George Soros: Blame Merkel

DAVOS/SWITZERLAND, 27JAN10 - George Soros, Cha...

George Soros knows money. A student of the great philosopher Karl Popper, he has become one of the most vocal critics of modern economics and capitalism. But he doesn’t just talk about the failings of the financial markets. He uses his insight to make a quite seriously incredible amount of cash from them. Out of this, he gives billions to worthy causes. A guy with an opinion worth hearing then.

So when, speaking at the Economics Festival in Trento, he lays responsibility for the Eurozone crisis squarely at Chancellor Merkel‘s feet, you sit up and take notice.

In a nutshell:

The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. [...] It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.

In other words, people lent cheaply to Eurozone banks and governments because they believed that there was zero risk of a Eurozone country being allowed to default. But after Lehman, Merkel – unilaterally – declared that Eurozone countries would have to support their own banks. Markets eventually realised this implied that Eurozone countries might have to default, and so lending costs to them shot up – just when we needed to borrow in order to support our banks! It was a single, immensely short-sighted decision of Merkel’s administration that precipitated our current situation.

And their continuing failure to respond adequately is turning a crisis into a disaster for the EU:

Just as in the 1980’s [Third World debt crisis] all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged.  Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe.

He does more than just lay blame of course. The power to save the situation, he argues, is also in the hands of the creditor nations. But it won’t be easy:

The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.

We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.

Three months, to get the EU back on the track of being a positive, voluntary association of nations. If we can’t do that, then the choice we’re faced with is basically between effective German control of an impoverished continent, or the sudden and messy disintegration of the Euro. So… We’d better find a solution to this thing. Stat.

I urge everyone to read the speech in its entirety, though if you’re in a rush The Journal.ie has a good summary.

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  1. #1 by droog on June 5th 2012 - 1:15 pm

    The speech is till running hot. Krugman today. I love it when a chart explaining a bubble traces the outline of a bubble.

    I’ve been reading J Clve Matthews for some years now. During that time he has been pro-EU, seemingly with more knowledge of the union than all major UK newspapers combined*. He started as an EU-skeptic long before I read him and claims that his study of the system made him favour it rather than oppose it. Anyway, he has been out on hiatus for a long while and recently came back denouncing the EU. Not the EU he defended, in a way, but this EU. In other words, the EU that has proven unconcerned with the hardship of its constituents in favour of…something. He focuses on the national governments that make up this EU, but I’d go further and extend that to the EU leadership that seems concerned in preserving, er, well something.

    And this is bizarre. It’s hard to tell what the EU thinks its worth saving. It’s not the well being of its citizens. And they certainly don’t want half of the Eurozone to dump the Euro; it hurts long term plans. At the same time, they don’t want the Euro to depreciate at the service of struggling nations trying to boost employment. And for the most part they don’t want the Euro to serve as a sock puppet to Germany’s wishes. But none of that amounts to a net, concise purpose. You’d expect them to try and come out with a stronger EU and Eurozone system, but how that particular aim is supposed to be part of the current strategy is beyond me. To me the current EU position seems to be rejecting anything that might plausibly come as a suggestion from an outside party. Listening to others is a sign of weakness, or something. This is a bit of a rambling argument but frankly they seem to be working hard at enforcing nothing but continuous rejections of what most member nations ever suggest.

    • #2 by Richard Chapman on June 14th 2012 - 3:52 am

      The inescapable problem now is a lack of a positive vision for the EU. How are we supposed to decide how to deal with a crisis if we don’t know what outcome we want?

      We need drastically to refocus on an EU that’s about people. The currency was supposed to benefit people. Now people are being punished for the sake of the currency. Something has gone wholly, utterly, profoundly wrong.

      Some are seeing this as an opportunity to accelerate a move towards fiscal union, making it virtually a fait accompli, even though the project may never have been so political unpalatable. I fear these people most, because their motivation is so noble.

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