European governments face the quandary of being unable to afford to bail out banks that are still considered too big to fail, while the global economy is heading for a slowdown in the second half of the year, economist Nouriel Roubini of Roubini Global Economics told CNBC Tuesday.
Governments are running out of ways to counter a "massive slowdown" or the risk of a double-dip recession, Roubini said.
"A year ago we had all these policy bullets," he said. "We could push down rates to zero, we had (quantitative easing), we could do a budget deficit of 10 percent of GDP (or) backstop the financial system."
"Banks at this point are too big to fail, but also too big to be bailed, especially in Europe where the sovereigns are in trouble and therefore the ability to backstop the financial system is not there," he said.
Roubini said he was unimpressed with the June US employment report, pointing out that the jobless rate fell because of a large number of discouraged workers leaving the labor force, and also noted recently weak data on manufacturing, retail sales and housing.
"Everything signals a slowdown of the US, a slowdown of Europe, a slowdown of Japan and a slowdown of China," he said.
The US economy will grow at a rate of 1.5 percent, while the euro zone and Japan will see growth close to 0 and China will grow at a rate of 7 percent, he said.
Dr. Dismal?
While not predicting a double-dip recession, with economic growth at a rate of 1.5 percent "everything becomes worse," Roubini said.
The unemployment rate goes higher, the budget deficit is larger, home prices don't stabilize, but fall further and trade tensions with China will be bigger, he said.
"You don't need to have a double dip recession to have a situation that is dismal," he said.
The economy was strong in the first half because of the stimulus and inventory build-up, but "once these things become a drag on the economy, balance-sheet constraints imply deleveraging by houses, deleveraging by the financial system and deleveraging by governments," Roubini said.
"We're going to have a global slowdown," he said.
