Russia's Ex-Finance Chief Has Grim Outlook for EU. By Alexander Kolyandr

Russia's Ex-Finance Chief Has Grim Outlook for EU. By ALEXANDER KOLYANDR
The Wall Street Journal, October 23, 2012, on page A11

MOSCOW—Just over a year ago, Alexei Kudrin came out of the Group of 20 meetings in Washington warning that the U.S. and Europe weren't doing enough to head off economic slowdown. Now, no longer in government but still highly respected for his fiscal prudence, the former Russian finance minister doesn't have to mince words. His message is even more dire.

Alexei Kudrin, left, spoke with Russia's Deputy Finance Minister Sergei Storchak during the VTB Capital investment conference in New York, April 2012.

Keeping Greece in the euro zone? "Already impossible," he says in an interview. Spain and Italy next for the exit? "The probability is very high." And creditors beware—Mr. Kudrin sees both Greece and Spain defaulting on their sovereign debt.

"Everything should be done to avoid it, but I don't feel that the process is under control," says the man who shepherded Russia from default to financial stability.

As if that weren't worrisome enough, the 52-year-old who was named finance minister of the year by various publications on four separate occasions during his tenure says he now fears that Europe's economic problems may turn into political ones.

Democracies, he says, don't always survive when their citizens are asked to make the kinds of economic sacrifices that Europe now faces. Already, some analysts are comparing Greece's shocked polity to the Weimar Republic.

Mr. Kudrin is more cautious, but plans to participate next month in a conference at St. Petersburg State University, where he is now a dean, on the question of how economic hardships can lead to political upheavals. The case studies aren't inspiring—from Communist Poland to the Soviet Union to Latin American dictatorships.

Mr. Kudrin thinks that citizens of the Western countries aren't ready to accept the steep drop in living standards they face, but that if governments fail to cut spending they will get even deeper collapses.

"Russia faced that in the 1990s, but due to [Russian President Boris] Yeltsin we've passed it peacefully," he says. "I'm not sure the Western countries would be able to pass through such hardships; it may be very painful."

Mr. Kudrin sees the recent decisions of the European Central Bank as only a temporary relief because its funds aren't limitless. However, he says, the euro would survive dropouts.

Mr. Kudrin expects European economies to contract further in the short term, before growth resumes, and he urges governments to reduce debt in order to be prepared for growth.

His outlook for the U.S. isn't much better. While the looming "fiscal cliff"—tax increases and spending cuts scheduled to take effect Jan. 1—worries analysts and economists, he said the size of the U.S. deficit is the real longer-term risk.

No matter which party wins the White House, the outlook is tough. "Both are in a very difficult position," he says. Even so, the dollar's future is secure, he says.

"Trust in the U.S. dollar is not shaken yet. If the U.S. administration meets the task of the budget consolidation in several years, the dollar will be firm, but even if it weakens, there would be no other currency to replace, given its scale and importance."