Roubini Global Economics

Mario Draghi appears well-placed to succeed Jean-Claude Trichet as the president of the ECB in October, leading to speculation about who will replace him as governor of the Bank of Italy. Four names are floating around: Lorenzo Bini Smaghi, Vittorio Grilli, Fabrizio Saccomanni and Ignazio Visco, the deputy director general of the Bank of Italy. Eurozone horse trading could support Bini Smaghi, but domestic politics could help Grilli, and frequently new governors have been sourced from within the Bank of Italy.

China is the world?s second-largest producer and largest consumer of grains, and it remains broadly self-sufficient despite rapid urbanization. Increased paychecks mean a smaller share of income goes toward food purchases, and consumers can afford more meat and dairy products. However, since it requires several calories of grains to produce a single calorie of meat for final consumption, China?s total grain consumption has increased about 2% annually on average since 1980. China?s ability to meet its rising grain demand with domestic production is reaching its limit.

In 2009, at the height of the global financial crisis, a reduction in capital inflows and domestic demand caused a narrowing of external imbalances across Europe. Now, as the region returns to growth and recovers from the crisis, Turkey stands out in terms of the size and speed at which its current account deficit is expected to grow. This is due in part to a more rapid recovery, but also to a shortfall of domestic savings relative to investment. The country is more reliant now than in previous episodes on short-term and historically more volatile foreign capital to finance the deficit.

S&P?s decision to cut its outlook for U.S. government debt from stable to negative?a historic first?sent markets tumbling: On April 18, the Dow Jones Industrial Average and the S&P 500 both recorded their biggest one-day drops in nearly a month (though U.S. Treasurys and the dollar did well). The landmark outlook downgrade reinforces what we have been saying since 2010: The United States is on an unsustainable fiscal path from which it cannot exit without political consensus. The key question is whether the gridlocked U.S. political system can respond in time to avert a bond market revolt.

The amplified shock from Japan?s March 11 earthquake, then tsunami, then nuclear crisis has rippled through the supply chain of its emerging Asia (EM Asia) neighbors. Production shutdowns and weakened demand in Japan began to register in Asia?s trade channels in the weeks following the disaster. As the extent and duration of disruptions to production in Japan become more apparent, the severity of regional supply chain interruptions and the effects on EM Asia's industrial production and export volumes and prices through 2011 can be better anticipated.

China can blow bubbles faster and bigger than any other country, but the Extraordinary Salt Mania of March 2011 takes the cake for speed, size and bizarreness. Shortly after radiation was reported to be leaking from Japan?s nuclear plant, rumors spread that China?s sea salt could be contaminated by radiation and that salt could prevent radiation sickness. The apparent demand and a perceived supply shock caused prices to spike upward of 85% in days. Media reported that a Mr. Guo bought 6.5 tons of salt, three days later prices collapsed after word from officials that there was no shortage.

Though Syria previously looked relatively sheltered from unrest elsewhere in the region, protests, now in their second week, are shaking the legitimacy of President Bashar al-Assad's regime. The violence perpetrated by security forces is likely to undermine promises of reform and political change, putting a question mark over the ultimate survival of the regime. The biggest rallies have taken place in the impoverished southern city of Dara?a. However, the uprising has spread to bigger cities around the country, including Damascus, Aleppo, Latakia, Homs and Hama.

The German economy is set to power ahead in 2011, as indicated by high-flying business and consumer sentiment surveys and full order books. The initially export-led economic upswing, stands to broaden further given the positive outlook for investment activity and private consumption. Despite the contribution from the moderating external sector, GDP growth will remain above potential, not least due to a sizeable carryover effect from 2010. RGE expects buoyant GDP growth in 2011, boosted by a sharp rebound in construction activity following the weather-related slump at the turn of 2010/11.

This year marks Chernobyl's 25th anniversary, and how ironic it is that the world has a new nuclear emergency on its hands: Japan's Fukushima power plant. The situation at Fukushima continues to worsen, with explosions at two more reactors and the radiation released surpassing that of Three Mile Island. The 40-year-old reactors were due for decommissioning at the end of this month. The Fukushima nuclear incident will likely be upgraded from a level 4 to a 5 on the International Nuclear and Radiological Event Scale. Chernobyl was a level 7?the only level 7 event so far.

The ?days of rage? sweeping through the Middle East and North Africa have raised questions about the possibility of a similar movement erupting in China. At a glance, the ingredients for uprising appear to be present. Online calls for a ?Jasmine Revolution? in China resulted in a massive staging of security forces at the planned protest sites, which could be taken as a sign of the Communist Party?s insecure grip on power. Like several of the governments, China?s ruling elite is plagued by corruption and is preparing for a transfer of power.

The emerging market powerhouse known as ?Chindia? is becoming a focal point of global attention as China and India show themselves to be growth dynamos of the coming Asian Century. But examining these countries? intrinsic differences is more illustrative than listing their similarities?and the two countries are likely to be on a divergent path over the next five years in the areas of growth, economic policy and politics.

The resignation of Egyptian President Hosni Mubarak will resonate across the Middle East but also in the capital of his most stalwart ally, the U.S., where policy makers are reassessing the ?certainty? that Egypt will continue to act as a ?moderating force? in the region. Having left the Soviet Union?s orbit in 1977 and signed a peace treaty with Israel in 1979, Egypt came to form the foundation of U.S. diplomacy in the region?a role that seemed so secure that its significance was widely overlooked.

Though Canada managed to avoid a U.S.-style housing crash, the Great White North may face its own set of difficulties, as the same ample credit extension, low interest rates and government incentives that helped the housing market rapidly recover the losses incurred during the 2008-09 downturn are contributing to increased household indebtedness.

Egypt?s political direction could have profound effects on regional stability?potentially involving, the Israeli-Palestinian conflict and efforts to contain Iran?s nuclear ambitions?with broad economic and financial ramifications. The recent economic and political developments do not bode well for Egypt?s debt, and this contagion could continue to spread within the region, leading to the persistent underperformance of local currency debt and equity markets. Regarding wider implications, the oil market remains the key link between instability in the Middle East and the global economy.

The UK government has engaged in a forceful reduction of its fiscal deficit (?Plan A?) to ensure debt sustainability and thereby reduce the risk of a loss of market confidence in public finances. The move has been effectively endorsed by Bank of England Governor Mervyn King, who has said that further quantitative easing could be used to support the economy if necessary (?Plan B?). In RGE?s view, however, the risk to the market was overstated, as the UK has enjoyed safe-haven status while pressures have intensified in eurozone countries.