tensions simmering across the Middle East and anti-Japanese sentiment flaring
across China, the European fiscal crisis all of a sudden seems like yesterday's
problem. Not so fast, say Nouriel Roubini and Ian Bremmer, who argue that while
the immediate disaster in Europe may have been averted, the fundamental
problems haven't even been touched.
In this wide-ranging
interview, Roubini and Bremmer see dark omens on the horizon: a "deteriorating"
geopolitical environment, a potentially "dangerous" trade war with China if
Mitt Romney were to win the U.S. presidency and label Beijing a currency
manipulator, and a "fear premium" spiking international markets over what seems
like inevitable conflict among the United States, Israel, and Iran.
Foreign Policy: Are we out of the woods in Europe yet?
Nouriel Roubini: The recession is still deep, and it's
becoming deeper. The vulcanization of banks and of public debt markets is still
ongoing, and therefore the economic side of the crisis is still with us. The
positive is that now the Europeans realize that for a monetary unit to be
viable, you need a banking union, a fiscal union, and an economic union to
provide legitimacy for the transfer of power from national governments to the
center. And they've finally put in play a coordinated bond program to provide
support to struggling sovereign states. Those are positives, but the
fundamental problems of the eurozone remain. The recession is deepening in the
periphery, ascribing to the eurozone extreme difficulty in reaching agreements
on these elements of a union. Take banking, or the first element of a banking
union; if it is supervisory, there is still marked disagreement on how, when,
and so on. So the challenges of restoring competitiveness, restoring external
balance, restoring growth, are significant, and therefore I still see a very
risky road ahead for the eurozone.
Ian Bremmer: George Soros, you probably saw it, came out and
basically told [Angela] Merkel that the Germans basically have to support growth or they
have to leave the eurozone. And of course, the reality is that Merkel is going
to do neither, and that's precisely why Nouriel's downside for continued
poor-growth recession, lack of competitiveness across the eurozone, is going to
persist, because the desire to fix these long-term structural problems of
eurozone governance comes part and parcel with very strong, long-term
austerity, which is causing very significant problems across all these
peripheral states. As a political scientist, I actually see an interesting
problem emerging: I'm quite optimistic, as I have been for some time, that the
eurozone stays in place and, ultimately, that governance gets stronger. But
what's interesting is that as that occurs, you are weakening national
institutions in Europe. And you're not just weakening from the top; you're not
just taking sovereignty away from many of these governments in terms of banking
regulation and in terms of budgetary authority and fiscal authority; you're
also undermining them from below because as you continue with this crushing
austerity, you're leading to a situation where every incumbent gets voted out
and extremist parties start popping up across Europe who are just disgusted
with their national authority. So as you work toward fixing the structural
economic imbalances in Europe -- or should I say the structural governance
problems -- you may start creating some unsustainable political conflict across
FP: Where's the leadership going to come from? There's no
longer Nicolas Sarkozy in France, and Britain's David Cameron is not interested
in playing any sort of a leadership role.
NR: Well, the problem with faith in the eurozone is, of
course, that you have 17 countries, 17 governments, 17 coalitions, and sometimes they don't agree even within a coalition, like in
Germany, within CDU, CSU, and Free Democrats. So any process that leads to more EU
integration, whether banking, fiscal, economic, political, is going to be very
challenging and take a long period of time. At the same time, as you suggested,
the top leaders, who believe much more strongly in this European integration,
are not there anymore. I mean, Angela Merkel comes from East Germany. We'll
have to see the views of the French Socialists. Some of them are more
pro-European; some of them, like the current foreign minister, Laurent Fabius, who
was against the referendum in 2005 in France -- he voted no -- is a little more
skeptical. And so, in other parts of the world -- and I spoke recently with [José
María] Aznar, former prime minister of Spain, he believes that there shouldn't
be a greater union, that Europe should remain a union of separate sovereign
states, certainly not the federal system. So there are marked disagreements,
and certainly there is no leadership.
IB: And that lack of leadership plays out internationally as
well. Historically, the Brits were very interested in having an outsized
international diplomacy role. Increasingly, you look at Cameron, you look at [Foreign
Secretary William] Hague -- these are folks who really are focused on the
economic side of Britain and trying to be part of the global growth story, but
not trying to play a significant geopolitical leadership role. Under Sarkozy,
France was much more interested in that. That's not true under [French
President François] Hollande. Germany is overwhelmingly focused -- yes, they
certainly are taking on a great deal of leadership in terms of the way we think
about European institutions, but beyond that, if you want to talk from an
extra-European position, outside of Europe, as Kissinger said, there's still no
FP: What about China? How worried should we be about the economic
NR: In China, there is an economic slowdown in capital
spending, infrastructure spending, and in real estate. And the problem of China
is to rebalance its growth away from net exports, away from high savings, away
from fixed investments (which is now 50 percent of GDP) and facilitate reform
that will increase consumption. My concern is that the new leadership is going
to come out of China and is going to be a collective leadership with seven or
nine members of the founding committee of the Politburo. Some of them are
pro-market-oriented folks; some of them are more in favor of civil enterprises;
some of them want to accelerate political reforms; but any progress they're
going to make in the election of balance in the growth rate of China is going
to be slow. It might end up being too late compared to what is desirable
enough. And by the mid to late part of next year, a hard landing in China -- meaning
growth at 5 percent or below -- becomes a more likely scenario.
FP: Do the Chinese
just not realize that keeping Xi Jinping in a box for two weeks is an
IB: No, they don't, and I think that they are piqued that
they have to say anything. They do not feel accountable, certainly not to the New York Times or to the international
FP: And high officials have blown off Hillary Clinton as well.
IB: That's right. And you saw there were sources close to
the leadership that said he had a minor back problem and that he'd be back. I
accept that at face value -- or close to face value -- in the sense that if it
had been something more serious, we would have seen folks close to Xi Jinping
leaving the country and showing up at American consulates, things like that. I
don't think there was a significant instability issue.
But the point is that the Chinese leadership has absolutely no desire or intention to provide any level of direct accountability
or transparency to the people that they govern. Their perspective is, "Look,
we're responsible for improving the social safety net; we showed you our
five-year plan. However we do that is really not your issue. This is not a
democracy." And the way they handled Xi Jinping shows that. But while it's not
a democracy, it is increasingly an informationally empowered society. It's very
hard to run a 21st-century economy with a population of 1.3 billion people with
a 20th-century government, and the ability of the Chinese to do this is going
to come under much greater pressure. And certainly I believe that the breadth
of anti-Japanese demonstrations that you've seen across that country over the
last couple weeks -- and the Chinese government clearly coordinated and
stimulated a lot of them -- it's not coincidence that that comes right after Xi
Jinping shows up. We're not going to talk about the "where was the president" issue; we'll talk about our level of distaste for what the Japanese are doing.
FP: It's the old bogeyman game that's worked so well.
IB: And it's interesting that it's focused on Japan. It
could have been focused on a lot of things. Japan's an easy one for the
Chinese, and the level of Japanese exposure to China is something that should
really worry Tokyo at this point.
FP: Nouriel, how concerned are you about the anti-Japanese
sentiment in China?
NR: Well, that depends on whether the shutdown of Japanese
firms in China is going to be a matter of days or persist over time. The
paradox of Japan is that by doing a large amount of foreign-backed investments
in China, it is hostage to the fact that political tensions on the issue of the
contested islands or whatever can cause a lot of economic damage to Japan. The
leverage of Japan is significantly limited.
FP: Ian, in the wake of the recent protests across the
Muslim world, are you concerned about the political risk to the United States?
IB: Well, the political risk to the U.S. isn't actually that
high. I don't think that anything happening in the Middle East is going to have
that dramatic an impact on U.S. elections, nor do I believe that the U.S. is
planning to play nearly as significant of a role in the Middle East as it has historically.
It's very interesting in terms of Israel. On the one hand, that means the
ability of Israel to get the U.S. to set down red lines to stop the Iranians on
the nuclear front is very, very constrained. And the Israelis are going to be
upset about that, and they're going to bluster about it, and they're going to
try and raise the perceived geopolitical risk so that people take it seriously.
On the other side, it's not all bad news for Israel. The
willingness of the U.S. to press the Israelis on settlements in the West Bank
is also going to decline, so you can play it both ways. But the real point here
is what we've seen over the past weeks -- these massive anti-Western
demonstrations across the region, the attack on the consulate in Benghazi. If
you thought it was going to be hard to stop the Syrian war and remove Bashar
al-Assad from power, it just got a lot harder. The U.S. is much less prepared
now to countenance support for a relatively unknown Syrian opposition that
includes many of the same sorts of Islamic militants that we see as sort of
armed paramilitaries in Libya.
The willingness of the Russians or the Chinese to
countenance more pressure on Syria has gone down significantly given what's
happened over the past weeks. Bashar al-Assad, 18 months in and 20,000 deaths
into the war that he's been prosecuting against his own people, actually looks
a little more insulated from Western and international pressure than he did a
week ago. And that's not just a problem for Syria; that's a problem in terms of
the potential expansion of that war into proxy conflict between Sunni-Shiite
powers in the region, the refugee crisis expanding into Turkey and Jordan and
elsewhere, and the destabilization of Lebanon. This has significant
implications, but perhaps fewer for the U.S. than anywhere else, and that's a
particular problem given that it's the U.S. that has historically done most of
the heavy lifting in this part of the world.
FP: Nouriel, how concerned are you by rising tensions over
Iran's nuclear program?
NR: I'm not a geopolitical expert, and I don't know whether the
likelihood of a military attack by Israel and/or the U.S. is high or not. Most
likely, it's not going to happen before the election. But I would say that the
only thing is by next year, sanctions are not going to credibly deter Iran from
continuing its project to develop a bomb, and therefore, even short of a
military confrontation, tensions are going to rise. Because Israel is going to
eventually take action, and just the threat that there is going to eventually
be war -- and that Israel, the U.S., and Iran are all going to be involved in
it -- could lead to an increase in oil prices. It's already been happening in
the last few weeks and months.
Given the slowdown in global economic growth, oil prices
today should be 10 percent lower than they are right now. Why are they so high
and rising? Because there is a fear premium, and in my view, next year that fear
premium is going to be higher. If there is war, oil could go to $200 a barrel
for awhile, and that can cause a global depression, but even if there is no
war, and oil goes to $130 a barrel because there is a fear premium, that's
going to be a negative for all oil-importing countries -- the U.S., Europe,
Japan, China, India, and other advanced economies and emerging markets that are
major oil importers. So it's a negative even short of an outside military
confrontation in the Middle East to cause some damage to the oil market in
negative ways for global growth.
FP: Do you buy Mitt Romney's statement that Russia really is
our "No. 1 geopolitical foe"?
IB: That's very funny; you know, [Vladimir] Putin just kicked
USAID [out of] Russia, so at the very least, it's going to cost U.S. taxpayers
a little less. Maybe Romney will like him more now. I think that it was a
little farcical that Romney called Russia the No. 1 geopolitical foe." It
implies that he was looking back at the 1980s or the 1970s. But then again,
when Obama was asked, he said that al Qaeda was our No. 1 geopolitical
foe, and that means he's looking back 10 years.
The reality is that China is the country that we're most
concerned about, but you don't want to mention China. It's like Voldemort, you
know, on the international stage -- because they can hurt you, and the U.S. is
very interdependent with China. So, they've been trying to manage the
relationship, but if you look at U.S. foreign policy and you look at the Obama
strategy, which has been this pivot toward Asia which includes engaging much
more closely and directly with American allies across the region -- whether it's Vietnam or Indonesia, Japan or
even Myanmar -- that's a strategy that has paid off quite well, for Hillary
Clinton in particular. There's also been a focus on economic statecraft in this
administration, which clearly is oriented over concern at the rise of Chinese
state capitalism. But if you look at Romney, he's made a lot of statements
about Russia, and he's picked on Obama for playing "nice-nice" with [Dmitry] Medvedev,
but the reality is that Romney has said that on day one, if he comes into
office, he's going to declare China a currency manipulator. Now, I don't
believe he would actually do that. But if you take him at face value, I assure
you that on day two of a Romney administration, Russia's not going to look like
the No. 1 geopolitical foe of the United States.
FP: Nouriel, what would happen if Romney declared China a
currency manipulator? Can you play that out, just a little bit?
NR: Well, there are two scenarios. One is that it starts the
process that leads to negotiations between China and the United States
regarding the trade imbalance; that the two sides, constructively -- in spite
of the tension -- sit down and discuss it. But I don't think it would be a positive,
and I wish that if Romney gets into power, he won't decide to brand China a
manipulator. If he does, perhaps China wouldn't respond that aggressively. But
there is a scenario in which both sides eventually escalate the tension, and
Congress starts to think about taking preemptive action against China, given
that they've been branded as manipulators, and then China could retaliate by
imposing tariffs on a number of U.S. goods, and that could escalate, not into a
full-scale trade war, but certainly into a trade war that becomes kind of
dangerous. So that's the risk.
FP: Should we be worried about increasing protectionism?
IB: I think we should be worried about more fragmentation of
the global marketplace -- and certainly that we're not going to be doing global
trade agreements anymore. We'll do regional trade agreements, we'll do
bilaterals, and that's less efficient for the global marketplace. I don't see a
lot more protectionism coming from the United States, and the reason for that
is because the legislative process in the U.S., Democrat and Republican,
remains dominated by private-sector interest. I mean, back in 1974, 3 percent
of congressmen that retired went into private-sector lobbies. Today, that's
over 50 percent for the Senate, and it's over 40 percent for the House of
Representatives. And that's true whether you're a Democrat or a Republican. And
that overwhelmingly is a break on greater protectionism because that has to go
through the same legislation. So people can talk a lot of red meat, but that's
very different from actually putting it into practice.
FP: Nouriel, in the Mother
Jones-leaked video of Romney, he claimed that global markets would welcome
his victory. Do you buy this?
NR: Well, I would say that certainly a meaningful part of
the business and financial community has been disappointed with Obama and would
prefer a Romney victory, believing that -- rightly or wrongly -- Obama has not
been as pro-business. So, yes, a Romney election might lead to a certain rally
in the stock market. But the reality is that the problems of the United States
require a bipartisanship response, because there is gridlock. And therefore,
the fundamental problem of fixing the fiscal solvency of the U.S. cannot be
addressed by one party alone. I'll give you an example. Say Romney is elected,
and he says I want to cut $3 trillion [of] spending on Medicare and Social Security
as a form of entitlement. Great, he's not going to have 60 votes in the Senate,
and therefore Democrats are going to say, either you have to include $1 to $1.5 trillion
worth of tax increases, especially for the rich or corporate environment, or
we're going to block this. So in some sense, it doesn't really matter whether
Romney is elected or President Obama is reelected. You need some modicum or
some degree of bipartisanship in the United States to resolve the fundamental
economic, fiscal, and financial issues that the U.S. is facing. So, even if
there was a short-term stock market rally, unless he can essentially induce bipartisanship,
that's going to fizzle out.
FP: Do you think the U.S. economy is really on the upswing?
IB: I mean, I'm generally an optimist on most things: I
believe in American progress; I believe in humanity's progress. When you look
at life expectancy, when you look at global health care, when you look at
people coming out of poverty, all those sorts of things are good. And the U.S.
drives more innovation and entrepreneurship and creates more new things that
really matter, game-changers, than any other country in the world. And that's
clearly long term very good for the market. I was looking at Apple's
capitalization today -- it's higher than the capitalization of all corporations
listed in Portugal, Ireland, Greece, and Spain combined, which says a lot. It
really says something. But increasingly, that's being done leaving behind very
large numbers of Americans. So you can tell me that even if the U.S. gets a
deficit that looks more sustainable, even if the U.S. starts putting policies
in place that are going to be very promising for foreign direct investment, if
larger numbers of Americans are not participating in it long term, that will
create more polarization in the system and will undermine the ultimate
competiveness of the United States. So I do have a mixed view as a consequence
FP: Nouriel, what are the unforeseen, destructive events that
have not been priced into the markets right now?
NR: Well, I think that the risks to the global economy are
several. One is that the eurozone crisis gets worse and becomes a train wreck.
The second one is that the fiscal cliff becomes severe in the United States and
you have a contraction. The third one is that you might have a hard landing in
China, and the fourth one is the risk of conflict in the Middle East. I think
that each one of them alone could trigger a global economic downturn because
they're all systemically important, let alone if several of them were to occur
at the same time in a virulent way. So, that's the risk we're facing. Of
course, with each one of them, appropriate policy reactions may stem those
risks -- for every problem, there is a solution -- but we'll see whether the
policy response is going to be adequate, within countries and across countries,
because a lot of them imply policy coordination, as in the case of the
eurozone. Even without a global perfect storm of crises the next year could be
quite bumpy for the global economy and for financial markets.
IB: I think the geopolitical environment is deteriorating. I
think America is stable and will continue to look stable; Europe is going to be
very disappointing from a growth perspective, but it's not going to fall apart.
But the geopolitical environment is deteriorating. We see this particularly
across the Middle East, and it's not going to improve. We'll see much more
sectarian conflict and -- although I don't think anyone's going to attack Iran
or stop them on the nuclear side -- the likelihood of growing interstate, not
just intrastate, conflict within the Middle East is growing dramatically. And
furthermore, the ability of countries to effectively balance between competing
U.S. and Japanese opportunities in Asia is becoming more of a problem. It'll be
true under Obama; it'll be true under Romney. We see that with China and Japan.
Despite all the attention we've had on the Middle East over the course of the
last weeks, the implications of dramatically deteriorating China-Japan
relations -- the world's second- and third-largest economies -- are vastly
greater for the global economy. We're going to see a lot more of that over the
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