Opinion Pessimism hangs in mountain air

The Financial Times contacted the big name economists attending the World Economic Forum to seek their views on the eurozone crisis and its likely implications. Almost as one,the respondents chimed with the downbeat mood expressed by the International Monetary Fund,saying the global economy was weakening and was at risk of another crunch if the eurozone crisis escalated.

Disagreement related to how bad things were likely to be. Carmen Reinhart,senior fellow at the Peterson Institute for International Economics,argued that with denial among policymakers still rife,the outlook was poor. There will be a “serious economic crunch or yet another sub-par year of stubbornly high unemployment,weak growth and delayed recovery in general in all the advanced economies”,she said.

Joseph Stiglitz of Columbia University also warned of the risk of another crunch,particularly with policy constrained in some countries and deliberately tight in others. Any crisis will be “all the worse because of the weakness of appropriate government responses”,he said.

But if the eurozone muddled through without the crisis intensifying,Mario Blejer,former governor of Argentina’s central bank,thought the chances of a crisis in 2012 were diminishing even though “the world economy will grow less in 2012,and some regions outside Europe will be in a minor recession”.

Almost all the big issues for the global economy depend on the eurozone getting to grips with its banking,sovereign debt and competitiveness crises. A powerful consensus exists among economists on what the 17-nation single currency bloc should do.

In what Moisés Naím of the Carnegie Endowment for International Peace described as “the most overdiagnosed and underacted- upon” crisis,the vast majority agreed the eurozone needed an urgent plan incorporating five elements: austerity and structural reforms in peripheral countries; fiscal integration with risk sharing,including eurobonds; interim liquidity support for countries struggling to borrow,preferably with strong support from the European Central Bank; a deep restructuring of Greek sovereign debt; and a eurozone-wide recapitalisation of European banks.

The only material dissenters from this consensus were Michael Spence of New York university and Kenneth Rogoff of Harvard,who argued that some countries probably had to face up to an exit from the euro. “Greece and probably Portugal need to exit,because there is not a potential for growth,” said Prof Spence.

Prof Rogoff said: “Will the eurozone finally wake up to the fact that a minimum of two or three periphery countries require huge writedowns and quite possibly a sabbatical from the euro?”

But almost all the economists were pessimistic that eurozone leaders would rise to the challenge,given the political constraints they faced. Daniel Gros,director of the Centre for European Policy Studies,said: “There is no chance they will do any of this unless the euro is about to implode.”

Prof Rogoff added: “The political paralysis is tremendous.”Chris Giles