Doomed Europe

By Felix Salmon
May 7, 2013
debate between George Soros and Hans-Werner Sinn about what Soros calls The German Question.

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It’s long — at some 4,500 words — but I can highly recommend the debate between George Soros and Hans-Werner Sinn about what Soros calls The German Question.

The debate is profound, and the two stake out radically different positions, even though they end up at pretty much the same place. Soros says that Germany should make a simple choice: either sign on to Eurobonds, where the euro zone as a whole would issue low-yielding debt to the benefit of all, or else leave the euro zone entirely. Either way, he says, Europe would win — either from reducing the fiscal burden of the various national debts, or else from seeing the euro devalue against the new Deutschmark.

Sinn agrees with Soros that Germany would be making a huge mistake were it to leave the euro zone; he disagrees vehemently, however, on the subject of Eurobonds. But both men are clear that given political realities in Germany, neither of Soros’s two choices is going to happen. Germany is going to stay in the euro zone, and Eurobonds aren’t going to happen.

That, says Soros, is a tragedy:

Europe would be infinitely better off if Germany made a definitive choice between Eurobonds and a eurozone exit, regardless of the outcome; indeed, Germany would be better off as well. The situation is deteriorating, and, in the longer term, it is bound to become unsustainable…

There is no escaping the conclusion that current policies are ill-conceived. They do not even serve Germany’s narrow national self-interest, because the results are politically and humanly intolerable; eventually they will not be tolerated. There is a real danger that the euro will destroy the EU and leave Europe seething with resentments and unsettled claims. The danger may not be imminent, but the later it happens the worse the consequences. That is not in Germany’s interest.

And even though Sinn thinks that Soros is wrong, his prognosis seems just as grim, filled with painful austerity and sovereign default:

The only remaining option, as unpleasant as it may be for some countries, is to tighten budget constraints in the eurozone. After years of easy money, a way back to reality must be found. If a country is bankrupt, it must let its creditors know that it cannot repay its debts.

My sympathies in this debate are with Soros, although Sinn does make a good point about the unintended consequences of Alexander Hamilton mutualizing state debts in 1791. (There really aren’t a lot of precedents for the kind of Eurobonds Soros envisages.) The overarching message from both of them, however, is that, as Soros puts it, “the current state of affairs is intolerable”. The only question is whether there’s a better alternative; Soros says there is, while Sinn says there isn’t.

The conclusion from them both, then, would seem to be that Europe as a whole is doomed to misery for as far as the eye can see, and that things are going to get worse before they get worse. I really hope they’re wrong. But so long as Europe’s future generations remain jobless, it’s hard to see a silver lining to this cloud.

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