Germany must defend the euro

By George Soros
August 12, 2011

By George Soros
The opinions expressed are his own.

Financial markets abhor uncertainty; that is why they are now in crisis mode. The governments of the eurozone have taken some significant steps in the right direction to resolve the euro crisis but, obviously, they did not go far enough to reassure the markets.

At their meeting on July 21, the European authorities enacted a set of half-measures. They established the principle that their new fiscal agency, the European Financial Stability Fund (EFSF), should be responsible for solvency problems, but they failed to increase the EFSF’s size. This stopped short of establishing a credible fiscal authority for the eurozone. And the new mechanism will not be operative until September at the earliest. In the meantime, liquidity provision by the European Central Bank is the only way to prevent a collapse in the price of bonds issued by several European countries.

Likewise, Eurozone leaders extended the EFSF’s competence to deal with banks’ solvency, but stopped short of transferring banking supervision from national agencies to a European body. And they offered an extended aid package to Greece without building a convincing case that the rescue can succeed: they arranged for the participation of bondholders in the Greek rescue package, but the arrangement benefited the banks more than Greece.

Perhaps most worryingly, Europe finally recognized the principle – long followed by the IMF – that countries in bailout programs should not be penalized on interest rates, but the same principle was not extended to countries that are not yet in bailout programs. As a result, Spain and Italy have had to pay much more on their own borrowing than they receive from Greece. This gives them the right to opt out of the Greek rescue, raising the prospect that the package may unravel. Financial markets, recognizing this possibility, raised the risk premium on Spanish and Italian bonds to unsustainable levels. ECB intervention helped, but it did not cure the problem.

The situation is becoming intolerable. The authorities are trying to buy time, but time is running out. The crisis is rapidly reaching a climax.

Germany and the other eurozone members with AAA ratings will have to decide whether they are willing to risk their own credit to permit Spain and Italy to refinance their bonds at reasonable interest rates. Alternatively, Spain and Italy will be driven inexorably into bailout programs. In short, Germany and the other countries with AAA bond ratings must agree to a eurobond regime of one kind or another. Otherwise, the euro will break down.

It should be recognized that a disorderly default or exit from the eurozone, even by a small country like Greece, would precipitate a banking crisis comparable to the one that caused the Great Depression. It is no longer a question whether it is worthwhile to have a common currency. The euro exists, and its collapse would cause incalculable losses to the banking system. So the choice that Germany faces is more apparent than real – and it is a choice whose cost will rise the longer Germany delays making it.

The euro crisis had its origin in German Chancellor Angela Merkel’s decision, taken in the aftermath of Lehman Brothers’ default in September 2008, that the guarantee against further defaults should come not from the European Union, but from each country separately. And it was German procrastination that aggravated the Greek crisis and caused the contagion that turned it into an existential crisis for Europe.

Only Germany can reverse the dynamic of disintegration in Europe. That will not come easily: Merkel, after all, read the German public’s mood correctly when she made her fateful decision, and the domestic political atmosphere has since become even more inhospitable to extending credit to the rest of Europe.

Merkel can overcome political resistance only in a crisis atmosphere, and only in small steps. The next step will likely be to enlarge the EFSF; but, by the time that step is taken, France’s AAA rating may be endangered. Indeed, by the time Germany agrees to a eurobond regime, its own AAA standing may be at risk.

The only way that Europe can escape from this trap is by acting in anticipation of financial markets’ reactions, rather than yielding to their pressure after the fact. This would require intense debate and soul-searching, particularly in Germany, which, as the EU’s largest and best-rated economy, has been thrust into the position of deciding the future of Europe.

That is a role that Germany has been eager to avoid and remains unwilling to accept. But Germany has no real choice. A breakdown of the euro would precipitate a banking crisis that would be beyond the global financial authorities’ ability to control. The longer Germany takes to recognize this, the higher the price it will have to pay.

George Soros is Chairman of Soros Fund Management and of the Open Society Institute. This piece comes from Project Syndicate.

63 comments

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One of the principal proponents of the globalist NWO, a totalitarian wet dream, deigns to come down from his arrogant and elitist perch to address the sheeple. Sorry, George, use your energies to enable your bankster buddies to rape and pillage some banana republic; you have already done enough damage to North America and Europe.

Posted by apber1941 | Report as abusive

I am surprised to read the emotional comments on Soros’ article. The Euro crisis is truly reaching catastrophic proportions that will shape the future of Europe and its people. The likely outcome of the coming months will more than likely sentence Europe to 20 years of pain and suffering

As unpalatable as it is, I agree with Soros. As long as Europe is a collection of individual states, it increases the risk for Europe and the Euro. The only true solution lies in greater integration. Alas, that is far away and Germany, the only possible leader of Europe, does not wish to lead the way, for perhaps plausible arguments. Indeed, Germans are heading in the opposite direction if anything and I expect Germany and a small club of homogenous economies, to pull out of the Euros in the coming two or three years, leaving the current Euro in tatters (I would not be surprised to see 3 or 4 ‘peripheral’ euros to the dollar within 5 years). Watch out for the rebirth of the Deutschmark a strong but relatively small currency. As correct as Germany, other Germanic and Scandinavian countries are to scold the peripheral European countries for the lack of productivity, their deceit and previous reckless governance, we all share the blame and ultimate burden for the current crisis, even if our guilt is one of omission. ‘Being right’ is poor consolation today and even poorer motivation for the present course of action in Europe.
Europe’s initial decision on Greece, which more correctly stated was Angela Merkel’s decision, was clearly penny wise and pound foolish. Unfortunately she bowed to the domestic political pressure on her in order to keep her job and her party in power. It is certain that this will go down in history as one of the most selfish acts and one sorely lacking in political leadership proportionate to Germany’s global economic stature and de facto guardian role of the European Union.
The approach described by Soros, being proactive with the markets is the only way but will unfortunately not happen as the politicians are fighting their own battles and not the one for the people of Europe. This is one of the grim snags with the European forms of democracy. How do individual European countries think their 10, 30, 60 million citizen sized countries will battle with China, India, Brazil or the USA in the future? Comments that the taxpayer is paying again is true but that has always been the case and always will be. Where else would the buck actually stop?

Comments supporting gold are misguided, in my humble opinion. Unfortunately we are months (at most) away from the gold bubble busting. I expect the $1850 level will be the point of realisation that it is a bubble. $1850 is the more or less the peak value (inflated) that gold has ever reached in the past. Unfortunately, the volume of trade in gold bears no significance to the actual reserves of gold and if people think that the sub-prime was painful, watch out because here comes a nasty surprise. The gold market is almost entirely speculative and is a castle built of cards. In addition, the size of economies around the world bears no relationship to the gold reserves, as they may have in the past, and gold simply cannot retake it former role as a safe haven. The world had grown too big for that.

On a side note, but related to our discussion, the future strength of China is also often overplayed in the media. There are two very serious problems at play there too that raise concern and puts China’s future global power status in grave danger. The first is the ‘soft landing’ the Chinese administration is trying to navigate. Unfortunately credit extension is massive again this year and the ‘Chinese sub-prime’ bubble is many times the size of the American/European ones of 2008. The clock is ticking loudly in the background but no one is listening. The bubble is reaching bursting point within the next year or two. The second serious problem is social unrest. China, due to its political nature, is a pressure cooker without a pressure value. There is no gradual release of pressure so expect a big bang one day out of the blue, fuelled by income in equalities between the costal and rural area and the ‘muslim’ unrest in the western region. The lid may stay on another few years but my guess is maximum another 4 years of perceived control before it explodes, probably following the financial bubble bursting.

We all know the dollar is in poor shape but those counting it as dead are moving too fast. The dollar is still the best of the worse going forward in the short to medium term. In currency terms, it is the one that is simply ‘too big to fail’. The Asian and Middle Eastern countries have so much invested in the dollar that they will not be able to let it fail (the same cannot, sadly, be said for the Euro).
Soros concludes his article by stating that Germany has no real choice. Unfortunately the German people and politicians are suffering from an (understandable) emotional reaction to the Euro crisis, smothered in an out-dated pseudo logic that is very short sighted. The consequences for Europe are dire as the dominoes are about to fall one by one in quick succession. Whether she likes it or not, Angela Merkel is the only person that can save the fate of Europe today. Let’s pray she finds the courage to do the right thing for Europe which includes a strong Germany. VmJ

Posted by VMJ | Report as abusive

I admire Mr Soros as even though I have a legal background, I am an up and coming currency trader, but not becuase of his background in the forex market but rather his philosophy of fallibilism, and his understanding and open mindedness towards the financial sector greed which has paved the way for the euro crisis, but more so the US turmiol. Mr Soros is merely putting forward a rather well analysed approach to countering a major EU zone problem which is unfortunately well in place, and as much as I completely understand the approach of pro German viewpoints of why should a AAA rated nation risk its financial sector on bailing out nations with a less disciplined and developed economy, it should also be noted that Germany itself had a major kickoff boost by leading euro nations, and the US after WW2, as they took Germany into their inner circle rather than abandonment which was the ill fated decision primarily by the French after WW1. On a wider scale I think that the euro and US may just still recover but their troubles are way beyond being the financial, and political leaders of our time anymore as power is clearly shifting to the east which as much as many would not like to admit has a much more responsible, banking, private, and investment secotor whom are responsibly regulated by their respective governments. Where as in the euro, and more so the US, the level of corporate influence, and their powers to lobby which quite simply is buying out politicians, and political power brokers has paved the way for the current economical state of the west and yet its laughable that we still see in the US organisations like the republicans, and more so the tea party movement lobbying (with great public support) for less corporate and wealthy tax, and more social security cuts. And where are the western corporations now that their countries of origin are in ecomomic turmoil? capitalising and breaking into new emerging markets in the east, thats where. Congratulations to the US, and the majority of its public for for their outcries, and despair at the mere mention of socialism or state capitalism which is now leading the way. May you all now rejoice and capture the beauty of what you have helped to implement, and create aka free flow, lawless, unregulated capitalism.

Posted by baz1 | Report as abusive

Soros is a cancer. He and Warren Buffett need to expire. Tired old fools. Again, the taxpayer ends up bearing the brunt of this meltdown. Germany should tell the EU to shove it….

Posted by crg27 | Report as abusive

Germany should never accept Eurobonds until the whole European governance system is adjusted to suit the issuance of such bonds. Until then, the Euro will get devalued by bailouts but that ultimately helps German exports and fills German coffers to pay for the bailout – while slowly steps are taken to transform the union into a political, economic and fiscal union with respective, union-wide institutions and regulations.

No rush Sir, things like that need time. We will get it done to perfection, after all we are German.

Posted by dcschmoeka | Report as abusive

Add to this the fact that without the PIIGS, the German economy would be in serious trouble. The Euro would be trading at highs of 1.60 to the dollar, or likely higher in the 1.70 to 1.80 range, due to the very own debt/banking crisis in the USA. In the end, the Euro crisis will turn out a blessing for the Union, as bad apples will be removed, precedents set to regulate and deal with extrem market conditions, and fiscal control centralized along with much closer political intertwining. It is hard to see a similar silver lining for the US.

Posted by dcschmoeka | Report as abusive

of course the rescue will come with lots of strings attached so Greece and other countries will sure loose their economical and then political independence. German will “reluctantly” agree for the Eurobond and soon becomes the European ruler. What Hitler failed to achieve through the war the German banks will achieve through euro.

Posted by arthur2000 | Report as abusive

How entertaining it is reading comments from you whiney little euro girls slamming Americans.. You gentle men.. actually men is a word you are by no means worthy of, since you were so busy hiding under your mommies skirts while we poured our guts out all over you mother land to free you cowards some years ago. You sound so educated and interesting but you lack everything that makes a man… run home to your mommies boys, step aside and let the men do the real work here.

All that being said Euro boys.. So smart but so broke! Fancy words, small brains and not guts! Germany should let you cowards wallow in the ineptness you deserve it.. la la la we are smart.. la la la..

Posted by euroblaster | Report as abusive

Dear Mr. Soros,

Although you appear to be concerned about the welfare of the entire world, the fact is you must have much at stake financially. The funniest thing is that just because you throw some of your millions towards causes that the left embraces, they’re unable to see what a slimy, cold, calculating pig you really are. I’m offended that Reuters gave you an opportunity to spread you personal agenda opinion piece.. Hopefully, things turn out the way they should to benefit all safely and not just to increase your wealth..Here’s to hoping you crawl into a hole and stay there! Best wishes!

Posted by soccermom7026 | Report as abusive

Soros probably is saying this so he can make money out of it – true loser (or winner)!. Germany to pump good hard working German’s money into to Euroland so it can support the corrupt, lazy and useless countries (people) like Greece, Portugal, and Italy.

Posted by PAK_US_Man | Report as abusive

The best way for Germany to retain its AAA rating is for it to jettison the Euro and return to the DeutschMark. Rational self-interest is one’s best ‘life-preserver’.

Posted by Eric93 | Report as abusive

Mr Soros has made billions betting for or against various currencies. And that is my point: You cannot bet against one without betting for another.
The USD is the currency of a nations whose per captia debt load exceeds that of Greece. Just now speculators receive newly printed (electronic) dollars at next to no interest from the Federal Reserve and deploy them shorting the Euro, and thus the whole project of European union.
Given this level of irresponsibility in Washington it is surprising the Europeans remain as supine as they do.

Posted by ChrisHerz | Report as abusive

About the worst thing any one could possibly do is follow advise from the likes of George Soros.

At a guess, I’d say he’s long plenty of Euros and expects German taxpayers to guarantee his speculative position / ‘investment’. They should do what most intelligent investors do nowadays: ignore Mr. soros or, even better, trade opposite to his public statements.

Posted by Elektrobahn | Report as abusive