George Soros’ advice for the euro zone

November 11, 2011

Europeans could use a little cheering up this week. One man who is trying to do that is George Soros. He knows his way around a currency crisis, of course, and he isn’t usually accused of being a Pollyanna. Soros thinks it is not too late to save Europe and the euro — but he warns that time is running out and that Europe’s leaders must fundamentally change their strategy to succeed.

Let’s start with the bad news. “Right now, the crisis has hit a new high, because there’s an unresolved government crisis in Greece and in Italy,” Soros said. “There is also a looming worsening of the financial crisis, because all the efforts to leverage the E.F.S.F. have run into legal or technical difficulties.” He was referring to the European Financial Stability Facility, the bailout fund for the euro zone.

“That means that currently Europe has no ring fence against a possible Greek default, and that is what is pushing the market into a renewed panic,” he said. “I expect the market to fall into despair and panic and I expect that to get worse.”

Despair may indeed be the right emotion, if you accept Soros’s prediction of what will happen if European leaders don’t get ahead of the markets: “This crisis is potentially bigger than the crash of 2008, because we have survived the crash of 2008 and we have not yet survived this one. There is a danger if they get it wrong then you have a financial meltdown. If there is a disorderly default in Greece, and the rest of the euro zone has not been insulated from contagion, then you could have a meltdown not only of the Greek financial system, but of the European and in fact the global financial system because we are so interconnected.”

So far, so dire. But Soros has two ideas that should perk you up. One is about the bazooka, and one is about the most important woman in the world.

The bazooka is the financial weapon Europe has created to defend ailing European economies from the skeptical traders who are betting against them. To end the crisis, Europe needs a bazooka big enough to convince the markets that making a wager against Frankfurt will be futile — and expensive.

Until now, the story of this financial crisis is one of European leaders consistently being one step behind the markets: bringing a fist to a knife fight, then a knife to the gun fight — and never bringing out the bazooka. Conventional wisdom — and the verdict of the markets this week — is that the European Financial Stability Facility war chest of €440 billion, or $600 billion, is a continuation of this pattern of insufficiency.

Soros disagrees: “It actually has the bazooka in its hand, provided it uses it in the right way.”

To do that, Soros said, Europe must first acknowledge what its bazooka is too small to achieve: rescue Europe’s faltering members directly. The bailout fund, he said, “was designed as a way of providing guarantees on government bonds, but for that purpose it is clearly inadequate. It cannot be stretched to cover Italy and Spain.”

But the bailout fund is big enough, Soros thinks, to save Europe in a different way. “It needs to be used to guarantee the banking system,” he said . “That would create a lender of last resort, which is currently lacking.”

The bailout fund, he continued, could take the solvency risk, which is beyond the legal right of the European Central Bank. “And for that,” he said, “there is plenty of money.” Thus shored up, the banks would be able to buy the high-yielding government debt of the European countries that are currently struggling to find lenders.

Banks would be encouraged to hold their liquidity in Treasury bills, Soros said, which they could sell to the European Central Bank at any moment. “So it is the equivalent of cash, and it would yield more than cash, therefore they would hold it,” Soros said. “That would allow countries like Italy and Spain during this crisis period to borrow at negligible cost.”

His plan, Soros said, would make Italy’s debt “sustainable, because the E.C.B. has any amount of money for the purpose of providing liquidity. At the same time, it would not violate the law against the E.C.B. directly financing the governments.”

Soros’s plan is essentially a way to get around Europe’s fundamental economic flaw — it has a single currency, but no lender of last resort: “It’s a trick, but a trick that would work.”

The European crisis has metastasized because Germany has been adamant about blocking precisely this sort of trick. The second reason for Soros’s relative optimism is his conviction that Germany and its leader, Chancellor Angela Merkel — the aforementioned most important woman in the world — have recently had a crucial change of heart.

“It is entirely in the hands of Germany,” Soros said. “Angela Merkel’s attitude has changed. She recognizes that the euro is in mortal danger and she is willing to risk her political future to save it. I think she recognizes that Germany has caused the crisis to get out of control, and she is now determined to correct that.”

Merkel is very good at getting what she wants, so fans of Europe and the euro should be somewhat reassured by Soros’s verdict. But only somewhat. Soros is a persuasive salesman of his plan to rescue Europe, but his most telling remark comes when I ask him what he would do if he were still actively trading.

“I would be sitting on the fence like everybody else, because the situation is so uncertain.”



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Well I’ll certainly sleep better tonight knowing that George Soros has optimistic ideas about the European financial situation. Sarcasm. It worries me how much faith and trust me put into this man considering the disdain he has shown for America. His active involvement with the former-Soviet states of Eastern Europe and Central Asia should keep us all up at night. I’m less concerned about Soros’ comments on Angela Merkel’s attitude and more concerned with his involvement in the opposition movement in Azerbaijan.

Posted by Tamara8293 | Report as abusive

Ok. What incentives are there to change the behaviour of the Greek politician Antonis “The Fakelaki” Samaras and his New Democracy party (the originators of the debacle) or elements the Italian Northern League Party?

Who is the lender of last resort for Greek politicians who want money from the eurozone, but don’t honour their promises? These politicians are the ditherers, bumblers, backsliders.

Waving money around or putting it in a little envelope to give to fiscally-irresponsible politicians does not change the fundamentals.

It is not a euro crisis, rather a necessary “crisis”/ “opportunity” to remove delinquent politicians from government. Messy, but they are (reluctantly) being removed.

I think George is helping to send this same message by sitting on the fence.

Posted by scythe | Report as abusive

I see finance talk over and over again, but please allow me to turn your attention to the notion of value that seems to fade amidst all this growing concern.
As far as I know Greece has the largest commercial navy in the world. On the other hand their economy suffers because the global recession hit them hard as trade slowed down. However there is a growing wave of interest towards the riches of the ocean, and there is at least one company doing sea floor gold mining, and it is obvious their transport capabilities are nothing compared to Greece. On the other hand there are trillions of karats of diamonds also on the shores of Africa. I mean, it’s just unbelievable. I’d bet on seafloor mining technology to team up with the cargo fleet shipping and make a killing in the mining industry.
But some big Greek smart guy or the folks in the EU parliament should propose a project of this scale to turn Greece into the world’s largest diamonds and gold miner since they have centuries of tradition behind them anyway. And then who cares about this “limited supply” mentality that we live with ? I mean we starve on the shores of Europe, figuratively speaking, but the riches are also out there at sea, as well as out there in the Universe. It comes as an untold truth that each country in the EU works to fulfill a specific task: X makes phones, Y has good agriculture and so on. But who digs out the gold and the diamonds ? Anyone ?

Posted by Romanian_guy | Report as abusive

I think we already knew that, one way or another, all these debts could be underwritten if the political will to do so could be found (in particular in Germany). Devising a clever scheme to get around legal difficulties arising from the treaty is all very well, but the fundamental question still remains. Are the lenders of last resort, whoever they may be, prepared to lose their money? At the moment, the answer to that question is clearly “no”.
If the answer were “yes”, the corollary of that would surely be full fiscal integration in the eurozone, at the very least, if only to improve the chances of the money being repaid. Ultimately, in this scenario, the PIIGS would be the poorer provinces of a united Europe, fully-subsidised by the taxpayers of the more prosperous North.
Finding the political will for that is not quite so straightforward, as I suspect Mr Soros is well aware.

Posted by CO2-Exhaler | Report as abusive

I had to laugh “because we have survived the crash of 2008 and we have not yet survived this on”. We have not survived the 2008 because what is happening today is continuation of the 2008 crisis. It may have ebbed somewhat, but now we are seeing resurgence. The basic problem is international trade, and until that is solved, nothing can be solved. You want to solve the problem, bring jobs back from China. All the economies in Europe are under the same assault. But until now, Germany and France were the big beneficiaries of trade. This is about to end.
Germany and France tried to screw the rest of Europe with the euro. The tables have been flipped, and they are endangering the rest of the continent. There was no way you could cobble different political and economic systems into one currency. Dreams of grandeur are becoming wet dreams, with a vengeance. They should just break this thing apart, it will never work.

Posted by contrarianview | Report as abusive

First, I believe by this weekend Italian spreads will come down…but will take time to get below or close to 4. Mario Monti is not only capable but a technocraft patriot. He’ll get the job done, I’m confident. He surely understands the underlying fundamentals and what is unsustainable for Italy.

Second, Greece is an inevitable case of default already; when will the oligarghs decide it’s in their intrinsic political interest to get the bailout funds from IMF/EU and then basta….But they’ve a another competent patriot to deal with, if they want to commit political suicide.

Soros is an Hungarian and European. He understands what ticks EZ. And he’s, of course, ahead of institutional structural developments inside EU which is still a project in progress.

We will get there once the political *tribes* begin to make more or less the same noise. Meanwhile those controlling the mouse on rating agencies are playing with fire.

Posted by hariknaidu | Report as abusive

According to the opinion of macro-analysis research firm, Wainwright Economics, a highly leveraged European Financial Stability Facility is not the solution for Europe, but another step in exacerbating the crisis. Piling on new sovereign debt in the European Union plays a causal role in slowing down the whole of the European economy. Increased government debt simply implies higher future taxes, and that drives capital away. In any case, the very purpose of debt markets is to discriminate between good and bad borrowers. Collectivization of distressed debt hampers the markets from pricing debt properly. In effect, European leaders are at war with the markets and they are quite open about that in their rhetoric.

Willem Buiter, a Cambridge economist who served on the Bank of England’s monetary policy committee, advocates a completely different approach. A sound, but politically unpalatable policy, would be to permit transparent default by Greece and other individual governments
that have mismanaged themselves. Buiter suggests a “You Break it You Own It” policy whereby insolvency of a sovereign is settled between the taxpayers of that sovereign and its creditors, leaving the European Union out of it.

Default, says Wainwright, would temporarily cut the governments of Greece and others from the bond markets and force them to balance their budgets. It would also relieve the pressure on other countries that are sinking into the same morass, but which are obliged to pay their share of the costs of rescuing their weaker fellows. Default followed by spending curbs has a good track record. It is the route by which Argentina achieved its current success, with a real growth rate of 7½ % last year according to the CIA.

Wainwright does add that a balanced budget cannot be accomplished with higher taxes, only with reduced spending. Unfortunately, government policymakers and most of the media deny these insights. Realistically, governments will always be as self-interested collectively as any other operator in the world economy, and governments are too politically-driven to learn inconvenient lessons. Even in Argentina, where the regime of Cristina Kirchner is extremely popular, it is already dissipating its success by vigorously expanding entitlement programs all over again.

Luis de Agustin

Posted by LuisdeAgustin | Report as abusive

If the Euro is crap, then why are we devaluating the dollar in order to compete against it. Fed, why are you doing this.

Posted by sorestloser | Report as abusive

It’s prudent to force the near bankrupt countries to address the root of thier problem (spending way more money than they have) before bailing them out of their liquidity crisis. Otherwise you’ve just kicked the can down the road.

The problem with using the bazooka is that the EU only has one shot with it. If that only provides a temporary fix the entire system goes down when the next liquidity crisis hits.

Posted by Tom_in_PA_USA | Report as abusive

Asking the great white how to fend off the Sharks….how stupid is that.

Posted by Steeltoe | Report as abusive

As a distant observer, it seems that the U.S. needs a technocratic government . Over the past 30 years, U.S. politician s have ruined the U.S.A. through incompetence by failing to lead, regulate, and monitor the egregious behavior of bankers. From allowing Greenspan to vastly span the green to Paulson’s pillage of U.S. tax payer money, to Goldman Sachs’ deceptive practices in helping Greece hide their debt, its astonishing there isn’t more protests occurring in the streets of the U.S.A.

Wow..! Isn’t capitalism great in the Europe in the U.S.?

Posted by LauteurCalme | Report as abusive

What surprises me is how Spain hasn’t blown up yet. The real estate bubble there was huge and unemployment is very high. Some banks had to take huge losses when the real estate bubble burst. Where is it hiding?

Posted by Discovery451 | Report as abusive

I would like the financial pundits to explain what they think the potential collapse of the Euro means to the American Dollar? It seems to me the Euro was the only currency that posed a threat to Dollar. With the Euro out of the way I would think it would provide a tremendous boost to the value of the Dollar cementing its position as the World’s preeminent currency.

Posted by GLK | Report as abusive

You state, “Soros’s plan is essentially a way to get around Europe’s fundamental economic flaw — it has a single currency, but no lender of last resort: “It’s a trick, but a trick that would work.””

I say, yet another cheap trick to get around banking legislation is the last thing this global economy needs.

How about some honesty for a change?

Posted by Gordon2352 | Report as abusive

As much as I don’t like Soros and the way he made money (by having other people to lose a lot for him to win), I have to moderate my view when I sense his view and see that his family had a greater vision than his group. If it’s true that they truly value the essence of Esperanto and share the vision that it has instead of our current petty groupy difference that have caused so many conflicts, then he has all the support I can give. If it’s true that he is not attacking the EU, and he sincerely shares the vision of his father then he should be respected.

Unlike Johnson, who is now on a trip of ‘cultural diversity’. Johnson and his backers are so short-sighted.
Diversity as the way they see it is a dangerous concept, it’s static diversity that causes difference in people, it creates pockets of differences, these differences lead to innate differences, innate abilities and eventually in ability to accumulate wealth.

You cannot complain about the gap between the rich and poor when people’s abilities become so diverse, so different. Most rich people are smarter (insert other abilities) and will get rich no matter what, the opposite can be said about poor people.

When you endorse diversity that will eventually lead to people that are so different, coupling with differences in wealth, in appearances, belief, in resources they possess. Hardship, jealousy and petty tribalistic groupy pride (root of racism is group/tribal/national/race pride currently fostered by 2 mains groups both think they are the center of the universe) will kick in and there will always be deadly conflict. In this era of weapon that is so destructive, there might not even be any left for a post war rebuild. And even if they can somehow artificially maintain peace and ‘diversity’ for some time, it will break out at some point later. This is even more dangerous, since later weapon will be even more destructive.

I might be thinking too much, but it’s just sad to see Johnson and his backers, his lobby gangs fighting us tooth and nail for their short-sighted vision. I give up, it’s other people’s problem now.

Please remember, diversity is inherited, but it is also created (in fact, it has to be created first before it can be inherited). There will be time when we need to throw away ideas that are too primitive and outdated, ideas that no longer suite us as we move forward. A united world is not that bad.

Everything that has a beginning, has and end. If you don’t regress toward the mean at all, you are creating a bigger gap. If you don’t change, you will perish.

I hope EU doesn’t disintegrate, it will take a long time, it will be slow but it’s the right direction.

Posted by trevorh | Report as abusive

Isn’t Sorus solution of having Europe’s banks hold their liquidity in US tresuries flawed? I thought T-bills were actually US debt, which have become considered the equlivent of cash these days because of course the US would never default on it’s debt. Wouldn’t Sorus idea just create more risk for the US because it increases our exposure to the chaos in Europe as countries one by one default on debt that was “considered as good as cash.” I’m very new to economics so would somebody exlain this to me?

Posted by Anonymous | Report as abusive

As long as there are Eurozone countries headed by government leaders like Papandreou and Berlousconi, the euro project will be at risk.

Posted by southernsword | Report as abusive

Where were all these naysayers 4 years ago??? Whenever anyone back then would say the markets seem overleveraged, and how come everyone is buying homes in the US, they were acccused of being gloom-and-doomers.

Well, we were right, and while it doesn’t help my broken business, it does feel good to have been right over all these business experts.

Soros is OK…. those of yoou who rant at him and repeat the claptrap of Mr Beck, please go do some of your own thinking rather than parrot the erstwhile Fox fool.

Posted by Talleyrand02 | Report as abusive

If he’s so pessimistic about the outcome he dare not speak of it. That doesn’t make a “Europeans could use a little cheering up this week” kind of article.

Posted by Collipops | Report as abusive

Europe needs real work where we manufacture and grow crops, all we have now are false jobs creating rules and training programs and putting ever more obstacles in the way of business…get the jobs back from BRIC, and let the bankrupt default buying more of their bad debt is a recipe for future failure.

Posted by Gillyp | Report as abusive

Soros is obviously a genius. What seems missing is a world view that includes noblesse oblige.

As much as everyone disliked Berlousconi I respected that he was a cross-over from the wealthy elite who wielded political power, and the problems that go with it.

I don’t think the answer is to shoot the rich, or the poor of the world. For social order the wealth has to be employed so that society functions and a “food chain” feeds each level of the economic strata.

The comments show a real spectrum of understanding of the issues.

So what to do with defaulting sovereign debts and the possible revolutions that go with it?

No prospects, no money, no jobs, and no hope.

I thought it telling that the Bank of Greece still holds gold bullion, why not use that to buy wheat for bread?
I think the Argentina analogy is a good one and valid here to a default scenario.

A New York cabbie told me in 2008 that the problem is interest on the money, that we should use the Sharia concept of no interest. I saw his point but how could the banking system work without interest?

It may be best if, in order to preserve capital, soft loans were given to “band-aid” over this turmoil. It is a compromise, but are we really ready for the social chaos that a huge crisis would create?

We need capital but it is a master without mercy.
I suggest that the real masters of wealth consider preserving the world. Does humanity work for capital or does capital serve humanity? We are all in together.

Posted by JMaitlandCarter | Report as abusive