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The European debt crisis: What's the end game?
By: Milken Institute
May 02, 2012
The European debt crisis is a "slow-moving train wreck, and things are getting worse rather than better," economist Nouriel Roubini told an audience at the 2012 Global Conference. (Full video is available here.)

In a bleak assessment, Roubini rattled off a litany of interconnected problems: public and private debts, recession, deficits, problems with the banking system, the credit crunch, the inability of the European Central Bank to solve the crisis, high oil prices, unemployment, political problems, reform fatigue and austerity fatigue.

Private debt has become public debt and then supranational debt, Roubini said, and "we cannot keep kicking the can down the road." No one is going to descend from space to solve the problem. At the end of the day, "Greece is not going to be the only country forced to restructure its debt."

Roubini predicted Greece would leave the EU in the next 18 months, followed by Portugal and Ireland. The two big elephants in the room, however, are Spain and Italy. Spain, which is especially at risk with a 24 percent unemployment rate, credit problems and a housing bust, could leave within four years. If Italy joins it, we'll have the breakup of the entire euro zone, he said.

Jason Cummins of Brevan Howard had a far more upbeat view. He said policymakers would eventually "do the right thing," and he urged panelists to keep things in perspective. "Greece defaulted, and we're still here," he said. "It's not the end of life on earth as we know it." He predicted all 17 countries will still be in the euro zone two years from now.

"The fall of the euro is inevitable," but the euro zone will not collapse, agreed Josef Stadler of UBS. Two or three countries may leave, but a core group will remain. "The key lies in Berlin," he said. "I'm very optimisticaEUR?there will be a solution."

Raymond McDaniel Jr., CEO of Moody's Corp., said Europe is in the midst of an "evolutionary process" that's "particularly painful and quite messy." He said Europe would need "rapid adaptation" in the direction of integration or default and disintegration, but "the middle path is not available at this point."

Europe needs to come up with a growth strategy in the next 12 months or we'll start to see strikes and demonstrations, Roubini said. "People are willing to tighten their belt if they see light at the end of the tunnel," but austerity without growth is unsustainable. "If the GDP keeps falling, the debt ratios are going to explode."

Ultra-high-net-worth investors are putting their money into real estate, precious metals and other non-bankable assets, Stadler said. "There's a clear trend outside the banks into real assets." Roubini raised an even more dire scenario if the average Joe in Europe follows suit in Europe, and we "could have a run [on the banks] by smaller depositors." He also predicted that currency tensions could lead to currency wars and eventually trade wars.

With such a gloomy assessment, panel moderator Christopher Ailman asked Roubini, "But the sun is going to come up tomorrow, right?"

Roubini retorted: "It's been pretty cloudy here the last few days."