Prominent economist Nouriel Roubini, globally recognized as "Dr. Doom" for his long-standing pessimistic forecasts, has predicted that U.S. President Donald Trump is more likely to escalate the war against Iran to secure a victory, rather than retreat and risk more severe consequences for the economy and international order. In an interview at a gathering of economists and business leaders by Lake Como in Italy, the former White House economist emphasized, "My baseline assessment is that the probability of escalation exceeds 50%. Although the risk of failure following escalation is lower than the probability of success, it still represents a significant strategic gamble."
Roubini, CEO of Roubini Macro Associates, who gained fame for his "doomsday" warnings during the 2008 global financial crisis, expressed a relatively optimistic view regarding the conflict with Iran. Analyzing the situation at the Ambrosetti Workshop in Cernobbio, he stated, "Further escalation by the U.S. and Israel is more likely to lead to the collapse of the Iranian regime. Therefore, even if oil prices rise in the short term, the outcome would be better in the medium to long term. This implies that both Trump and Israeli Prime Minister Benjamin Netanyahu have incentives to escalate the conflict and strive for victory." Notably, Iran and Israel continued exchanging missile fire on Friday, with Iran also attacking several Gulf states. Just hours earlier, Trump once again postponed the deadline for Iran to agree to reopen the Strait of Hormuz, threatening attacks on its power facilities otherwise.
Roubini warned that a prolonged war would harm the global economy, particularly due to "tail risks"—if the U.S.-Israel conflict escalates, Iran could intensify attacks on oil facilities, potentially triggering an energy crisis reminiscent of the 1970s. Currently, U.S. military actions against Iran have prompted several countries to lower their economic growth forecasts while preparing for energy-driven inflation. He pointed out, "Even if the war ends tomorrow, oil prices will not return to pre-war levels," though a 10% to 15% increase "does not yet constitute a catastrophic shock." As oil and gas costs continue to climb and confidence indicators drop significantly, countries like Germany and Italy are reassessing their growth prospects. Last week, the European Central Bank issued a more pessimistic economic outlook for Europe.
When asked about the implications for monetary policy, Roubini suggested that the European Central Bank might have to raise interest rates in April or even June, and the Bank of England could follow suit. He also noted that the Federal Reserve might find itself in a difficult position, potentially forced to hike rates to prevent inflation expectations from becoming unanchored. Reflecting on past delays, Roubini recalled that the Fed was slow to raise rates in 2022, nearly losing credibility. With a leadership change imminent—Kevin Warsh set to replace Jerome Powell as Fed Chair in May—he stressed that the new chair cannot afford to damage their reputation at the start of their term and may have no choice but to increase rates.
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