Soros: The euro zone is about more than money

September 13, 2012

George Soros made headlines this week with a striking proposal that to save Europe, Germany must “lead or leave.” The leadership part was familiar: Outside Germany, at least, it is becoming conventional wisdom that Europe will survive only if the Union’s behemoth provides more decisive leadership — and writes bigger checks.

The catch is that the rest of Europe, particularly its beleaguered so-called Club Med countries, doesn’t seem to be in much of a position to coerce Berlin to do anything. That is where Soros’s second alternative — leaving — comes in. In an interview in Vienna last weekend and in a speech in Berlin on Monday, Soros added his influential voice to a cluster of iconoclasts who have asserted that Southern Europe’s fate need not be decided in Germany.

If Germany is unwilling to lead, Soros argues, the Southern Europeans should ask Germany to leave. His prediction is that these currently sickly nations would do perfectly well.

“If Germany left, the common market could hold together and actually it would be a remarkable relief,” Soros told me. “The euro would fall in value, so the debt which is denominated in euro would also fall in value and the competitiveness of the debtor countries compared to Germany and the other creditor countries would greatly improve.”

In this scenario, the Club Med countries would benefit partly from the inflation and currency devaluation that their existing monetary marriage to Germany precludes. Their renaissance would also be based on their economic fundamentals, which Soros argues are strong but are being discounted by the markets because of the existing fiscal and monetary straitjacket.

“It’s remarkable, remarkable, when you look at the Latin euro, that is to say the euro excluding Germany, it actually compares very favorably, not only with Britain, but with the United States and Japan,” Soros said.

“A Latin euro, where the members formed a fiscal union and would therefore go to introducing euro bonds, would be able to borrow at rates comparable to Japan, theUnited States and the United Kingdom. They would rank equally on the macroeconomic basis, if you compare them in terms of total indebtedness and deficit.”

Soros argues that Europe couldn’t survive the exit of one of its weaker, southern members but that it could weather the “amicable” departure of Germany.

“If Italy or Spain left, not only the euro but also the common market and the European Union would fall apart,” he told me. “Whereas if Germany left, the common market could hold together.”

Soros acknowledges that a German departure would be “a big dislocation” and a “shock,” but he thinks that the euro and the financial arrangements it supports would endure. This is, mildly put, not the consensus view.

Yet Soros knows a thing or two about currencies and bonds, which is why his economic policy prescriptions carry such weight.

He is also one of the millions of Europeans with experience of death and destruction. As a teenager, Soros hid from the Nazis in occupied Budapest; a couple of years later, still in his teens, he fled the Communists to make his way, penniless and alone, in Western Europe.

That personal history helped to inspire the second part of Soros’s message: of the promise and the peril of Europe. When it comes to peril, Soros warned that existing policy is sorting the Continent into two tiers. This Europe, he said, “is divided into debtors and creditors, with the creditors led by Germany being in charge and calling the shots and the debtors relegated to an inferior status which is threatening to become permanent.”

The historical precedent, he noted, was grim: “After the First World War, when the French imposed reparation payments on Germany, then they were sort of the tough taskmasters, they occupied the Saar, and the result was the rise of Hitler. It really would be a tragedy if Germany now fell into the same trap.”

Now for the promise: Soros remains a committed European, passionately supportive of the moral idea that animated European convergence.

“The European Union,” he said, “was meant to be an association, a voluntary association of equal states, each of which is devoted to the principles of democracy, rule of law, human rights, sacrificing part of their sovereignty for the common good.”

Millions of bitter experiences like those of the Soros family were the most powerful reason Europeans vowed never again, and embarked on their ambitious unification project. Soros notes that a successful European Union is important far beyond its borders.

“A united and prosperous Europe, devoted to the principles of open society, is very much needed by the world,” he told me. “I have a network of foundations working in various parts of the world, and I can give you personal testimony of how important it is to have a Europe that is strong enough to project its influence in the rest of the world. Take, for instance, the transformation that’s taking place in Burma, or in some of the African countries; there’s a very positive role that the European Union can play.”

As Europe teeters from one crisis to the next, Soros reminds us all that at its heart, the European Union is about more than deficits and currencies and bonds. Europe is also a political and moral idea — one very much worth preserving.

PHOTO: Billionaire investor George Soros speaks at a forum Charting A New Growth Path for the Euro Zone during the annual IMF-World Bank meetings in Washington September 24, 2011.   REUTERS/Yuri Gripas 


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Germany was created to put an end to the destructive savagery of the Hungarians; this probably led to other Europeans to structure themselves into nations capable of dealing with the German Empire;
Where are we today? Saxony does not need to hold together Germany any longer, since the Hungarians are relatively calm; so what is the purpose of Germany? and if Germany vanishes what is the point of being French, Spanish etc…? or European?
I see the economic and monetary weakness of the Eurozone as reflecting a deeper context;

Posted by Paats-W. | Report as abusive

Europe exists as a beacon of hope for the world’s billions of non-powerful people, including much of the USA.

Monolithic power and single purpose becomes tyranny all too easily. An increasingly wealthy and powerful elite, contemptuous of the hoi poloi, has brought economic and political decline to the USA. This is a caution Europe should heed. Most European political parties have more variety of policy options within their own ranks than the USA has in its entire system. Uniformity and centralized power do not encourage either innovation or risk taking on the part of the vast majority of people.

Posted by usagadfly | Report as abusive

George Soros is a genius. I mean that in the old sense of the word thinking of people like Einstein or Locke, not the director of a summer movie.

Even a genius gets it wrong sometimes. Germany may be able to lead the euro out of trouble, but it cannot leave. The economics are disastrous.

The rest of Europe owes Germany €750bn in Target2 balances in the banking system. When money moves from a Eurozone bank in one country to another, the ECB does not actually move the money. Rather, it makes bookkeeping entries on a ledger. At first, money flowed to German banks, because of the its exports, but now money is fleeing the beleaguered PIIGS banks and being deposited in Germany among other havens.

The result is that if Germany decided to revert to the mark, its banks would have a €750bn hole on their balance sheets that would have to be made up with a bailout of the entire German financial system. I know Mr. Soros is a shrewd speculator and a genius, but just because he says that the German exit could be managed does not make it true. Even today, two plus two must still equal four.

On the other side, old George is being very selective with his data when he says that

“It’s remarkable, remarkable, when you look at the Latin euro, that is to say the euro excluding Germany, it actually compares very favorably, not only with Britain, but with the United States and Japan,”

Budget deficits and total debt compare favorably with those countries, but that is where the comparison ends. The PIIGS do not have competitive export industries to export their way out of trouble, and their demographic situation is catastrophic. The United States and Britain are younger countries; true, they have demographic troubles looming in the future, but the PIIGS are already there.

Japan has those demographic troubles, but it actually makes things that the rest of the world wants to buy like Britain. It goes without saying that the United States has many world-leading industries and is blessed with a wealth of natural resources.

A Latin Euro would be akin to the Hapsburg Empire on the eve of World War I, a bunch of drunk men holding each other up by leaning against each other. One well-placed push will send the whole mob to the ground.

Mr. Soros is a member of the cult of the euro. He believes that the euro is a step on the way to a political union that will lead to a United States of Europe. The reason the Europeans supposedly need a politcial union is to end the possibility of war on the continent.

Hasn’t this possibility already been dramatically reduced by the stability policies championed by the United States? The Marshall Plan and NATO did most of the job years ago. Even before the advent of the euro, would you have thought that France and Germany could go marching off to war against each other in 1998?

The raison d’être for the cult of the euro is really to pool Europe’s power so that these countries do not become irrelevant in world affairs. The ambitions of politicians and elites run counter to the common people. Jean, Juan, Johan and Giovanni do not need this power; the elites do. The people are doing fine in countries like Denmark, which stayed out of the euro.

In the article, Soros states

“The European Union,” he said, “was meant to be an association, a voluntary association of equal states, each of which is devoted to the principles of democracy, rule of law, human rights, sacrificing part of their sovereignty for the common good.”

All of these noble principles had been achieved before the advent of the euro. In fact, the existence of the euro is what is threatening the EU today. For some reason, the elites are equating the EU with its principles with the common currency. Several countries in the EU chose to retain their national currencies, and they are no less democratic, nor devoted any less to rule of law or human rights than those who chose to use the euro.

Eventually, a politician in one of the PIIGS will develop a persuasive argument for leaving the euro that sways the electorate resentful of humiliating austerity conditions. The breakup will begin. Maybe it won’t happen tomorrow, but it will happen.

Posted by dareconomics | Report as abusive

Soros has lost his mind. Borrowing at rates similar to Japan? The US? The UK? He is going to invest his money at near Zero interest with Greece? Japan’s debt is held by the Japanese so they are not going to crush their own economy with high interest. The UK has it’s own currency and gets financing on the merits of it’s economy which includes Oil exports. The US is buying bonds with monopoly money freshly printed in the fed basement. That little trick is going to spur inflation and create a weak Dollar. Anyone investing in US bonds that are not TIPS is foolish.

Posted by DennisVictor223 | Report as abusive

before europe becomes a beacon of light and reason it must get its house in good order. you don’t have much cred if you are broke and has a history of dodging tax and going on spending binges.

Posted by oslolen | Report as abusive

Greece or Germany will have to exit the Euro.
That’s what the numbers say.

Posted by EthicsIntl | Report as abusive