Tom Keene Talks with Stephen Roach

How will the Chinese react to the European crisis?

China's biggest export market is Europe, now larger than the United States. They view the crisis as a negative to the external demand that they need.

Why can't we clear the markets in this crisis as quickly as we did in 1998 when the Asia crisis peaked, Russia defaulted, and Long-Term Capital Management imploded?

Over the last 25 years we had an average of one crisis every three years. The gap this time is 18 months. The scale is bigger. And we [now] have product contagion from subprime to mortgage-backed securities, back to cross-border contagion within the euro zone. This interplay between cross-border and cross-product contagion is very difficult to unravel.

What is the price of what we are seeing in Europe?

With every fix comes an adjustment in the real economy. We saw that in Asia in the late '90s. We saw that in the U.S. in 2008 and 2009, and we are going to see it in Europe, certainly in the peripheral countries, with significant contractions in the years ahead. So this concept of the global double dip is alive and well.

What will the impact of the crisis be on the European Central Bank?

We see the politicization of once fiercely independent central banks. It's very worrisome for their credibility and inflation-fighting mission.

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