MacroScope

Europe may still be ‘on path for a meltdown’: former Obama adviser Goolsbee

Reporting by Chris Kaufmann and Walden Siew

For all the enthusiasm about the euro zone’s exit from recession, many experts believe the currency union’s crisis is more dormant than over. That was certainly the message from Austan Goolsbee, former economic adviser to President Barack Obama and professor at the University of Chicago. He spoke to the Reuters Global Markets Forum this week.  

Here is a lightly edited excerpt of the discussion:

What is your biggest worry about the U.S. economy right now?

A nagging worry is that if we grow 2 percent, it’s going to be a hell of a long time before the unemployment rate comes down to something reasonable. The nightmare worry is that Europe is still basically on path for a meltdown and that it ignites another financial crisis.

In my view the root of the problem is that most of southern Europe is locked in at the wrong exchange rate and will not be able to grow. Normal economics says that with a currency union you can 1) have massive labor mobility, 2) subsidies, 3) differential inflation, 4) grind down wages in the low productivity countries. But those are the only four things.

You believe that? That Europe is still on a path for a meltdown?

So, 1) and 3) seem very unlikely. Either northern euro/Germany says they are willing to subsidize permanently to hold together or I think there is a crisis every nine months until someone says they can’t take it and bail.

That may not mean global recession – nobody has been counting on much growth from the euro zone lately (unlike, say, the impact of a big slowdown in China). But the euro banks have major capitalization issues and if the euro zone melts, it could lead to some runs which would not be good at all for the rest of the world.

from Tales from the Trail:

White House adviser nods to bubble risk in China

He was probably only trying to be funny. But White House economist Austan Goolsbee touched a raw nerve by inferring Chinese investors currently exhibit the same kind of bubble mentality that Americans displayed prior to the collapse of the U.S. technology stock bubble in 2000.stocks

Goolsbee, chief economist to Obama's Economic Recovery and Advisory Board, was asked if poll findings that 72 percent of Chinese would invest money in technology stocks, versus 60 percent of Americans who would put it in a bank, meant the United States had lost its nerve on taking risk.

"We are in a deep recession. It is clear that that has scared people," Goolsbee told a panel at a conference on innovation and the economy sponsored by Intel Corp. and the Aspen Institute.