A path through Europe’s minefield

October 13, 2011

By George Soros
The opinions expressed are his own.

Earlier this week, a group of almost 100 prominent Europeans delivered an open letter to the leaders of all 17 eurozone countries. The letter said, in so many words, what the leaders of Europe now appear to have understood: they cannot go on “kicking the can down the road.” And, just as importantly, they now understand that it is not enough to ensure that governments can finance their debt at reasonable interest rates; they must also address the weakness of Europe’s banking system.

Indeed, Europe’s banking and sovereign-debt problems are mutually self-reinforcing. The decline in government bond prices has exposed the banks’ undercapitalization, while the prospect that governments will have to finance banks’ recapitalization has driven up risk premiums on government bonds. Facing the prospect of having to raise additional capital at a time when their shares are selling at a fraction of book value, banks have a powerful incentive to reduce their balance sheets by withdrawing credit lines and shrinking their loan portfolios.

Europe’s leaders are now contemplating what to do, and their next move will have fateful consequences, either calming the markets or driving them to new extremes. All agree that Greece needs an orderly restructuring, because a disorderly default could cause a eurozone meltdown. But, when it comes to the banks, I am afraid that the eurozone’s leaders are contemplating some inappropriate steps.

Specifically, they are talking about recapitalizing the banking system, rather than guaranteeing it. And they want to do it on a country-by-country basis, rather than on the basis of the eurozone as a whole. There is a good reason for this: Germany does not want to pay for recapitalizing French banks. But, while Chancellor Angela Merkel is justified in insisting on this, it is driving her in the wrong direction.

Let me stake out more precisely the narrow path that would allow Europe to pass through this minefield. The banking system needs to be guaranteed first, and recapitalized later. Governments cannot afford to recapitalize the banks now; it would leave them with insufficient funds to deal with the sovereign-debt problem. It will cost much less to recapitalize the banks after the crisis has abated and both government bonds and bank shares have returned to more normal levels.

Governments can, however, provide a credible guarantee, given their power to tax. A new, legally binding agreement – not a change to the Lisbon Treaty (which would encounter too many hurdles), but a new agreement – will be needed for the eurozone to mobilize that power, and such an accord will take time to negotiate and ratify. But, in the meantime, governments can call upon the European Central Bank, which the eurozone member states already fully guarantee on a pro rata basis.

In exchange for a guarantee, the eurozone’s major banks would have to agree to abide by the ECB’s instructions. This is a radical step, but a necessary one under the circumstances. Acting at the behest of the member states, the ECB has sufficient powers of persuasion: it could close its discount window to the banks, and the governments could seize institutions that refuse to cooperate.

The ECB would then instruct the banks to maintain their credit lines and loan portfolios while strictly monitoring the risks they take for their own account. This would remove one of the two main driving forces of the current market turmoil.

The ECB could deal with the other driving force, the lack of financing for sovereign debt, by lowering its discount rate, encouraging distressed governments to issue treasury bills, and encouraging the banks to subscribe (an idea I owe to Tommaso Padoa-Schioppa). The T-bills could be sold to the ECB at any time, making them tantamount to cash; but, as long as they yield more than deposits with the ECB, the banks would find it advantageous to hold them. Governments could meet their financing needs within agreed limits at very low cost during this emergency period, and the ECB would not violate Article 123 of the Lisbon Treaty.

These measures would be sufficient to calm markets and bring the acute phase of the crisis to an end. Recapitalization of the banks should wait until then; only the holes created by restructuring the Greek debt would have to be filled immediately. In conformity with Germany’s demand, the additional capital would come first from the market and then from individual governments – and from the European Financial Stability Facility only as a last resort, thereby preserving the EFSF’s firepower.

A new agreement for the eurozone, negotiated in a calmer atmosphere, should not only codify the practices established during the emergency, but also lay the groundwork for an economic-growth strategy. During the emergency period, fiscal retrenchment and austerity are unavoidable; but, in the longer term, the debt burden will become unsustainable without growth – and so will the European Union itself.

This piece comes from Project Syndicate.

Photo: A demonstrator from Spain’s 15M movement rolls a giant wheel symbolizing euro through a crosswalk during a protest against the economic crisis, banks, rating agencies, and austerity measures in Europe in central Madrid, July 28, 2011. REUTERS/Paul Hanna


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These are all swell ideas, but they just guarantee that the resulting crash will be even bigger. Next?

Posted by Jim1648 | Report as abusive

Nope. No tax payers money this time, sorry.
A new law on heavy criminal charges against bank directors such as those from Dexia (idiots leveraged the bank on the brink of destruction) would be quite approriate.

You see, the public is fed up. Screw the market reaction. We have too many investment bankers anyway.

Posted by FBreughel1 | Report as abusive

The governments in Europe and the US are now close to 50% of GDP! This much gov is miles from be sustainable and an indication of just how socialistic we’ve become! Asking what you country can do for you isn’t working folks! Also, secularization of church and state has ruined our morals/ethics! Calling it progressive is an oxymoron!

Posted by DrJJJJ | Report as abusive

Euhh, DrJJJJ, you do know it is much worse than that, right ? Maybe you check some OECD figures ?

Posted by FBreughel1 | Report as abusive

There is an implicit assumption in Mr Soros’s arguments that the EU will be able to grow its economies as soon as things settle down and the “temporary problems of excessive debt” are solved. This is a common belief and it applies to most world economies, including that of the US. What is the reason for such beliefs? They don’t seem to be based on any economic fundamentals but rather on the experience of the last century or two. That growth was mainly caused by industrialisation and the boom in technological innovation.

It has caused us to believe that growth will always happen so long as we don’t mess things up. People expect it. So governments have tried to maintain ever increasing living standards for their people and that has lead them to borrow far more than they can ever afford to repay.

To grow themselves out of debt the countries will need to grow their economies significantly faster than their populations. How likely is that to happen? The boom years pre–2008 showed that the EU countries cannot achieve it, even with the huge stimulus of enormous government borrowings. Moreover, Mr Soros’s proposals require governments to take on more debt, be it explicit or implicit via guarantees. That is all citizens are to bear the losses of some, supposedly, for the good of all.

Posted by GivaFromOz | Report as abusive


You allude to an important topic, but don’t quite state it. GDP is a fairly worthless measurement of economic well-being in the post-industrial age, but that is what all the governments are beating themselves (that is, us) trying to achieve. More and more “stuff” only makes the problems worse, not better. Most people have the essentials, and even a few luxuries. And quite a few people have a lot more than that.

In the high-tech age, iPods can substitute for expensive stereo systems of an earlier generation, and if we spend most of our time at our PCs, houses can be smaller, etc. The old standards do not apply. Artificially juicing up the economy to produce more of the old stuff is a waste of time and money. But elections are won and lost by such trivia, so the politicians have to try and meet market demand to supply it. Maybe after the next Great Depression values will be sorted out to a more sensible level.

Posted by Jim1648 | Report as abusive

Greece is going to default, either de facto or by means of some kind of “haircut” that essentially has the same effect; they are too far in debt, and the Greek public is not in favor of digging themselves out of that hole. I think the entire crisis was inevitable once the Euro was created. The concept of the Euro is that many individual countries can maintain their individual sovereignty while enjoying the benefits of a common currency. The problem has always been that the countries have different cultures and different disciplines in terms of monetary and social policies. It has simply taken a little over ten years for those differences to manifest as problems. Now many member nations rightly ask why they should foot the bill for other nations that have not stayed within the debt levels to which they agreed when they joined the EU.

I see only two possibilities. Either the EU member countries surrender their financial freedom to a centralized financial system, or the Euro breaks up. There is little incentive for the frugal countries to commit to such a loss of sovereignty (for loss of monetary control is loss of power); it is opening the door for their economies to be basically robbed in favor of spendthrift countries. The Euro breakup could be gradual, with each country dropping out when the social costs of fiscal clean up become too high. Or it could be sudden, if several nations run into trouble at once. There is always the possibility that fiscally responsible countries, such as Germany, will realize that they could do better on their own, and chose to pull themselves out of what has become a very big mess – a mess that they did not create. It doesn’t necessarily mean the end of the EU; after all, the UK is not tied to the Euro and is an EU member state. But it very likely means the end of the common currency.

Of course, the EU could form a closer political union like the United States. But due to the vast cultural and historical differences, that simply will not happen.

Posted by stevedebi | Report as abusive


Those are all valid points. But Germany would not be entirely altruistic for supporting the Euro. They sell a lot of goods to the weaker countries such as Greece. They are gambling that they will get repaid, but it is a Ponzi scheme with willing participants. If Germany wants to bail out, that is fine, but it won’t be without some cost to them.

Posted by Jim1648 | Report as abusive

The President is proposing to create public service jobs and call the new hires “tax payers”. I haven’t heard of such bold-faced b.s. Talk about buying votes for the 2012 election out in the open for crying out loud. These positions would then be permanent, union protected graft generators. Wonder if there is a leveraged derivitives market for labor slots you can sell to hedgefunds?

Posted by mdblitz | Report as abusive

[…] here an opinion piece by George Soros and have a look on the right side for the link to the Project […]

Posted by An article and a new link « Proeconomia | Report as abusive

The many faces of greed now reveal the many ways that ideology serves as a self protective device.

Most of the comments posted here do not address the argument that George Soros put forward.

Instead, each commenter has his own axe to grind depending on his political point of view.

And that, to a large extent, is the problem. The problems the world confronts are too large and multifaceted to be addressed through the lens of narrow self interest, through the narrow gate of conservative or liberal ideology.

As long as the discussion is framed that way, the deeper the problem becomes, the more difficult and impossible a solution. Forums like this reveal much, resolve little; hence they serve as a microcosm of the discussions taking place inside ministries and central banks.

At what point in a crisis do we turn from judging the problem through our idealogical bias to attempting to find a solution that actually solves the problems at hand?

There are many examples of human foolishness where that never happens and someone starts a war. Or a revolution.

Posted by NewNegotiator | Report as abusive

This is a solution to the financial problems but it does not address the more fundamental problem of the countries that are ‘living beyond their means’ for want of a better term. Salaries, costs and prices of local services and goods are far too high in the peripheral countries relative to the core. They are still living a life style they cannot afford from the real output of their economies. The populace of Greece, Ireland, Portugal etc should not be able to afford new cars, foreign holidays and fancy consumer goods etc – which was the situation prior to joining the Euro. They have had little real growth since then but have had a huge increase in living standards. During the Euro years I have watched hotel costs, restaurant prices, salaries rocket whilst the consumption of luxury consumer goods has risen dramatically. Friends in these countries have bought new luxury cars and new houses that they and the country really can’t afford. This has not been matched by a boom in foreign earnings so the slack has been made up with credit. It is the rebalancing of this that will save the Eurozone – not simply writing off debts or recapitalising banks. Unfortunately no one is talking about it. Not everyone can live a German lifestyle unless the economy earns it.

Posted by pavlaki | Report as abusive

The ECB has been dysfunctional in dealing with the crisis thus far – they seem to think that mimicking Bernanke’s strategy of “do anything but face it – defer the pain of deleveraging at all costs so my banking buddies can continue to reap their bonuses” is the only way to go.
And yet Mr Soros expects that same ECB to monitor the banks on a day to day basis to ensure they behave? Talk about the fox guarding the henhouse!!

Posted by martinm7703 | Report as abusive

It’s a smoke-screen for the Bring Back Jesus movement. Today’s history lesson…
http://en.wikipedia.org/wiki/Restoration _of_the_Jews_to_the_Holy_Land

Posted by Tiu | Report as abusive

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Greece is broke. The nation is impossibly mired in debt, and it is unlikey the Greeks will conjure a new source of national wealth within the coming weeks. Greece has been shielded from bankruptcy to afford other PIIGS, and weakened nations like France, time to shore up banking finances. This has created a travesty dispensed upon the Greecian peoples enslaved to endure.

As for Mr. Soros’ notion of affording wealthy bank patrons blanket guaranteed deposits, said act would again force an adopting nation’s peoples to accept a sisyphean burden. Let the banks fail, the weaker nations restructure obligations, the rich take a cut, and the masses realign to the resulting new reality.

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Goerge Soros is right in his article, and correct in his analysis of the overall framework Europe should undertake to effiently and effectively control the situations it currently faces.

However, in the framework proposed, there needs to be the oft-mentioned “haircut” by holders of bonds if/when nations default (or “restructure”).

“Haircuts” (or losses, as the rest of the world knows them to be) need to have their image re-inforced as legitimate and natural events in the lifecycle of any form of investment. By doing this, it will centralise thought to solving potential issues in the financial/banking sector first, and separate the cause from the effect. In the article above, this method will also separate the taxpayer from the issues to be confronted by the financial/banking sector.

Europe, so far, has seemed to place cause and effect in the same basket making it too big to handle as a single issue. It needs to impliment a multi-pronged series of separate solutions to solve the current crises (more than one crisis) and effectively re-create a path of stability, solution, and ultimately, growth.

Anyone can play the “blame game” now for current crises, however now is the time for solutions to current issues, and later is the time for accountability.

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Simple solution – devalue the Euro.

Posted by maxsshoephone | Report as abusive