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Will The Eurozone Survive? Will The Dollar Strengthen? Economists Gaze Into Their Crystal Balls

As the global economy continues its tumultuous ride, RFE/RL correspondents Heather Maher and Jeremy Bransten asked three prominent economists to gaze into their crystal balls and forecast what 2011 may bring.

Simon Johnson, former chief economist at the International Monetary Fund, is a professor at the Massachusetts Institute of Technology and writes for “Economix,” the economics blog of “The New York Times.”

Allan Meltzer is a professor of political economy at Carnegie Mellon University and a leading historian of the U.S. Federal Reserve.

Roger Bootle, managing director of Capital Economics, has advised previous British governments and his book, "Money For Nothing," anticipated the currently financial crisis. Bootle writes a weekly column for "The Daily Telegraph" on the challenges facing the world's economic policymakers.

Simon Johnson: "I think the eurozone will survive but I doubt that it will have its exactly current composition."
RFE/RL: Will we see the world’s major economies entering a period of stronger recovery in 2011, or are we in for a double-dip global recession?

Simon Johnson:
I don’t think there will be a double-dip recession, which would mean a contractional fall in economic output. But I do think the European economy will be troubled. I think there will be another round of crisis, probably in the spring, and that will slow down the world economy. So there will not be a strong recovery, and there will be a major problem with unemployment around the world.

Roger Bootle: Neither. Those two states of the world don't exist as inexhaustible possible eventualities. I think what will happen is that growth may well fade a bit, because I think in Europe there's going to be a crisis, and I don't see much scope for growth being stronger in the emerging markets than it has been recently. So I think we're going to see growth at around these levels or a bit weaker but probably not a double-dip recession.

RFE/RL: Allan Meltzer, do you see the world economy moving out of crisis, stagnating, or falling back into a danger zone?

Allan Meltzer:
I think it’s moving forward -- at least certainly in Europe and the United States, which are the areas that have been hardest hit. Moving forward, but at a slow pace in the United States. We can’t expect employment to rebound very rapidly because a great part of the employment that is lost has to do with construction of houses and buildings, and that is going to recover very slowly as long as there [is] a large overhang of unsold houses on the market.

RFE/RL: Will the eurozone survive long-term in its current form? What is your outlook one year, and five years, out?

Simon Johnson:
I think the eurozone will survive, but I doubt that it will have its exactly current composition. It is 16 countries now, becoming 17 countries when Estonia joins in January. And I also doubt that it will be able to continue with this policy of always bailing out countries that get into trouble. So there will be major changes in the composition, structure, and operation of the eurozone.

But I do believe there will be a core eurozone that survives. I think that will be a strong core. I think that will be a prosperous core. And I think that will be a core that challenges for global leadership, just as the Europeans have been hoping for, for a long time. ...Over the next year we have a crisis repeated, waves of crisis and struggle to reform and change the eurozone. But after five years, I am confident they will have sorted out these problems.

I can’t guarantee that all countries currently in the eurozone will be benefitting from the new eurozone structure, but I do think that there will be a strong, healthy, relatively vigorous eurozone that survives.

Roger Bootle: "My suspicion is that the dollar will strengthen."
Roger Bootle:
I don't think the euro is going to survive in its current shape. I'd be surprised, now, if at least one country doesn't leave the eurozone, and it may well be more dramatic than that. I think we're going to see a rolling financial crisis as countries continue to experience budgetary problems and the countries of the eurozone are unable to agree a satisfactory resolution program.

Now, it's possible that eventually this is going to end up in something more dramatic. A thing that I think needs to happen is for the euro to essentially split into north and south. But for that to occur, there's got to be a revolution in political thinking in Germany. And I think they're not ready for it yet.

Allan Meltzer: I can’t see how countries like Greece can avoid restructuring their debt. That is, most of the lending that has gone on through the IMF and the European Union that’s attracted so much attention and discussion doesn’t solve any real problem; it just postpones the problem. The problem is that they have a larger debt than they’re able to service. And sooner or later they’re going to have to restructure, and the sooner they do it, the better it is because they’re suffering a great deal from the efforts to avoid having to restructure the debt. There are other countries that may be in the same position.

Allan Meltzer: "I can’t see how countries like Greece can avoid restructuring their debt."
RFE/RL: And how do you view the health of the dollar?

Allan Meltzer:
The long-term movement of the dollar is down. What it does from one month to the next depends upon so many factors that it’s impossible to make any sensible prediction about it. But I think it’s notable that, against the weak European currencies -- because of the problems in Europe -- the dollar has on average declined for the last several months.

Simon Johnson: The dollar will obviously be helped by weakness in the euro and problems in the eurozone. People will seek the dollar as a safe haven whenever there is major trouble or fear about problems in the countries, such as Spain or Italy or Belgium. But over the longer run, I think that the dollar has many problems. Fiscal policy in the United States continues to be irresponsible, and as the new euro establishes its credibility, people will shift out of dollars and they may shift into other currencies as well, over time, and that will tend to weaken the dollar.

Roger Bootle: Forecasting currencies is a mug's game. We all have to do it, but I think the uncertainties are, as always, enormous. My suspicion is that if I'm right in thinking that the eurozone is set for a rolling financial crisis, my suspicion is that the dollar will strengthen.

RFE/RL: What about gold and other commodities? Will the rally we’re seeing now continue over the next year?

Simon Johnson:
It’s very hard to predict what will happen with precious metals because so much of the demand there is purely speculative and driven by fear of various kinds. For industrial raw materials and food, there will be strong demand – the growth of emerging markets such as China, Brazil, India, Russia is not going to stop. However, it is also very difficult to predict what happens to commodity prices. In general, I think commodity prices will go up and down quite sharply, even though the demand for commodities and the overall amount of commodities produced and sold round the world will increase.

Allan Meltzer: I think there’s generally a long-term problem of inflation in the United States without an adequate method of control. So the dollar will decline [and] commodities generally will rise. If you look at energy prices like oil, oil really matches the movements of the dollar. As the dollar goes down, the oil price goes up because the people who are selling oil recognize that it’s the real price that matters and not the nominal price.

Roger Bootle: I don't have very strong views on this question of gold and commodities. My suspicion is that if I'm right in thinking that the world recovery will run out of steam a bit, I think that will cause commodities to weaken and I suspect also with gold. It's more difficult to call this. Gold had a fantastic run, and there are those of course who see it going very much higher. But after such a run as this, if I were forced to bet one way or the other, in a year's time I think I would bet it being weaker.

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