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Europe in ‘Protracted’ Slump That Will Shift Debate, Roach Says

The euro area is in a “fairly protracted recession” and European leaders will shift their focus toward fighting rising unemployment, said Stephen Roach, non-executive chairman of Morgan Stanley Asia.

“Grappling with the crisis is definitely understandable, but I think the debate is going to shift to fighting recession in Europe,” Roach said in an interview today with Bloomberg Television’s Maryam Nemazee in Davos, Switzerland. “Europe is in a recession now, and it’s likely to be a fairly protracted one with a very limited recovery in the years ahead.”

Talks on a debt swap to avert a Greek default resume today as international policy makers squabble over the mounting cost of the rescue. The financial turmoil led the International Monetary Fund to cut its forecast for global economic growth and it also forecast a recession in the euro area.

“As we grapple with all these special measures to shore up bond markets and inject liquidity in the markets, the recession and rising unemployment will become a greater and greater issue for European authorities to contend with,” Roach said. “They don’t seem to be even talking about that right now.”

The IMF said the 17-nation region may enter a “mild recession” in 2012 as it forecast a 0.5 percent contraction.

Austerity Pressure

HSBC Holdings Plc Chief Global Economist Stephen King said German-driven austerity in Europe risks undermining any chance of an economic recovery in the region.

“What she’s doing is creating an austerity union and an austerity union will effectively drive down growth in Spain, Italy and so on,” King said, referring to German Chancellor Angela Merkel. That “will eventually have a negative effect on Germany.”

He said that while the euro area may need a fiscal union it “also needs to have some growth and there has to be some tackling of that growth issue.”

Roach said the euro-area debt crisis is not over and policy makers in advanced economies have limited options in responding to the financial crisis.

Policy fatigue “is very real,” he said. “European leaders have had something like 14 crises in the past 24 months, so every six weeks or so we have to deal with another crisis with very limited detail on the so-called resolution policies.”

“In the developed world central bankers are out of ammunition,” he said. “They’ve embarked on these adventurous unconventional policies of quantitative easing, which have had no meaningful impact on anything other than stopping markets in crisis, and I think that’s very worrisome. That’s a big risk for the world in the years ahead.”

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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