Presently: Managing Partner and co-CIO of Cogo Wolf Asset Management llc Formerly: a) CEO of Optima Asset Management Ltd, Bermuda, 1994 - 2005 b) Director, Global Asset Management Ltd, London, 1987 - 1994
George Soros’ first prescription for solving the Euro crisis looks flawed. He is certainly right in deploring the catastrophic social results of euro membership now playing out in Greece, Spain, Portugal and Italy (and soon to spread to France) but his remedy for the adoption of Eurobonds seems misguided. Unless Mr. Soros is recommending that the indebted countries simply shed all liability for their debts and shift them onto the Eurozone (i.e. the unconditional, open-ended joint liability and sovereign financing which is presently prohibited), enabling the uncompetitive Euro members to swap their existing debt for Eurobonds will be entirely ineffective unless there is a simultaneous large fall in the value of the euro. Unless this occurred, the weight of the debts would be unchanged and would need to be borne somewhere. It would be no different from unlimited financing by the European Central Bank under its OMT program, except that the creditors would be individual investors rather than the central bank of the Eurozone. The likely market result would be that the bond rates applied to individual countries would vary, as now, depending on the market’s judgments of each country’s prospects of returning to sustainable growth and financial stability. This would, in theory, give the periphery countries time to carry out ‘necessary reforms’ to their economies. However, as Mr. Soros notes, Eurobonds will not ensure recovery. With public debt already above or near the level of GDP in all the countries mentioned above, the likely result, if the interest rates they pay on the new Eurobonds exceed, as now, their growth rates, will simply be to propel them further towards the event-horizon of debt default (or towards the counterpart of this, ever-increasing bond rates). They would soon be in the same position as Greece today. (Mr. Soros’ faith in the ability of governments to stimulate economic growth is misguided. Japan over the last two decades, and the USA and the UK more recently, have demonstrated conclusively the impotence of traditional Keynesian measures in certain circumstances.) However, his alternative remedy, that Germany leave the Eurozone, is much more realistic. The fact is that any durable solution to the crisis must enable the peripheral countries, which include for this purpose France, to return to sustainable positive growth. This will not happen while they share a currency with Germany. As Mr. Soros says this is no fault of Germany; her dominance of Europe is a simple geo-political fact which has been a permanent feature of the European scene for more than 150 years. Germany was able to benefit from having a weak euro as its currency during years while it adjusted to the absorption of East Germany; it is time to ‘renvoyer l’ascenseur’ and help the rest of the Eurozone to undertake their own adjustments. Finally, Mr. Soros’ reverence for the ‘small group of far-sighted statesmen’ is deeply regrettable. These wise men and their followers (fighting, as senior politicians always do, the dangerously irrelevant battles of yesteryear) have led to the creation of a social, political, financial and economic catastrophe of huge proportions. So far from practising pragmatic ‘piecemeal social engineering’ they systematically ignored and suppressed any public accountability in their pursuit of creating the bureaucratic tyranny which the EU has become (the description, from more than a decade ago, is that of Larry Siedentop, then a lecturer in politics at Oxford, in his book ‘Democracy in Europe’). The result is as far from the European (and Popperian) democratic and libertarian ideals that inspired Mr. Soros, and many of us, as it is possible to be. The real tragedy is that the possibility of a sensible collaboration among the European nations (which would, realistically, grow slowly and incrementally over decades) will be set back a generation or more. Giles Conway-Gordon
Herr Fischer’s comment on the UK’s attitude to the EU is an excellent example of the superficial, tendentious and deeply cynical and irresponsible arguments now in general use by the European Union elite to counter criticism of the operation of the EU, of the political direction it is pursuing and of the likely damaging consequences of these.
Herr Fischer pretends that the purpose of David Cameron’s speech was merely to solve a domestic political problem within the UK Conservative Party and that he is risking the wider future of the UK to defuse it. While this may well have been the trigger, Herr Fischer must be aware that the reason for the rise of the UK Independence Party and for the now widespread and steadily growing anti-EU sentiment among the UK’s citizens is the gathering objection to the way the original aims of the so-called ‘European Project’ (the free exchange of goods, services and people and the firm embedding of democracy in the continent of Europe, embodied in the European Economic Community), have been steadily subverted and altered, with negligible reference or accountability to the citizens of Europe, to become the comprehensive federal political system the European elite now look forward to.
It may be true, as Herr Fischer states, that a necessary condition of the survival of the euro is ‘much closer political integration’ but it is deeply dishonest to maintain that the survival of the euro is thereby a necessary and valid reason for the imposition of a federal political system in the EU. The evidence, presently in Greece and before long in Portugal, Spain and Italy and in due course France, is that the structure and operation of the euro since its inception has led to a collapse of growth and to human misery on a colossal scale. The latest economic data from Spain confirm the continued collapse into depression.
The only valid solution to this gathering disaster is that these countries are enabled to return to durable economic growth. This will not be possible while they share the same currency as Germany yet Herr Fischer’s compatriots continue to insist that austerity is the only answer. Even the IMF now acknowledges the error of this.
(In February, 1996, before the launch of the Euro, Herr Fischer’s compatriot, Otmar Issing, then a board member of the Bundesbank, later first chief economist of the ECB and one of the advisers deeply involved in the creation of the Euro, wrote a short paper 'Europe: Political Union through Common Money' (published in the UK by the Institute of Economic Affairs). In it he set out his doubts as to the soundness and durability of the planned currency union. Recently, in an article in the Financial Times, he re-confirmed his sceptical view of the Eurozone structure. For him, one of the wise men present at its launch, the Euro is not irreversible.)
All the evidence from economies, financial markets and societies since the start of the crisis has confirmed that the Euro is not simply unworkable in its present structure but catastrophically malign yet Herr Fischer, along with the rest of the European Union elite, insist that it is essential. The argument now presented is that because the euro cannot survive in the absence of political union, the EU must jettison democracy and move as soon as possible to authoritarian government by an unelected group of expert commissars with no democratic accountability worth the name. The peoples of Europe are to be sacrificed on the altar of the Euro.
It is this decisive shift away from democracy and towards an unaccountable bureaucratic tyranny that is at the root of the concerns of the British people. It may be disobliging to say so but the concept and practice of democracy has much longer-established, deeper and stronger roots in the UK than in continental Europe. On the basis of the evidence so far, the EU and the EZ are heading for severe political trouble and, given the size of the imbalances involved, it is very difficult indeed to see an orderly solution. David Cameron was too polite to say so but it is time politicians like Herr Fischer started to behave like genuine democrats, listen to the people and preserve, rather than crush, democracy in Europe.
George Soros' solidarity houses initiative is admirable and welcome but it is simply social sticking plaster; it does nothing to solve the fundamental problems facing Greece, Spain and Italy (and in due course France).
With debt-to-GDP ratios which will exceed 100% within 3 years all these countries are approaching the debt event- horizon heralding default. At this point any interest rate on borrowing even marginally above the growth rate (let alone 4 or 5%) will lead inexorably to default. Unlimited bond buying by the ECB will simply delay the inevitable.
A necessary precondition of any realistic solution to these countries' dire situation, politically, socially, economically and financially, is that they be enabled to return to durable growth. Realistically, this is impossible while they remain within the Eurozone.
Nonetheless the European political and bureaucratic elite (including most recently Mr. Draghi) continue to maintain blindly that the Euro is irreversible and insist on insane austerity programs which are creating social devastation and human misery on an enormous scale.
George Soros presents, as equally valid alternative solutions to the euro crisis, Germany quitting the euro or Germany accepting its dominant political and economic role in the Eurozone (EZ) and ‘leading the creation of a political union with genuine burden-sharing’. These two ‘solutions’ are not equally valid and very far from equally achievable. Mr. Soros sets out the chief advantage of Germany’s leaving the EZ: the immediate euro devaluation which would occur, helping the debtor countries to return to economic growth and the economic (and ultimately financial) rebalancing of the EZ. This would obviously create severe hardship for Germany but it proved itself capable of adapting to pressure of a similar size and scope when it merged with East Germany. The mechanics of a German departure are not hard to specify and have been used quite often in the last few decades in other cases. But Mr. Soros’ easy and uncritical assumption that a systematic shift to German hegemony in the EZ, politically, economically and financially, would be equally successful and equally easily achievable, looks completely unrealistic. Successful implementation would entail the complete dismantling and restructuring of long-established economic and social behavior in the peripheral economies. It is difficult to see this being achieved without much time and great difficulty; a recent report by the Bank of Italy and Confindustria, the Italian employers federation, reckoned that the modernization and restructuring of Italian industry would add 11% to Italian GDP but would take 30 years. Furthermore, the immediate consequence, for Italy and others, would be a steep additional rise in unemployment, particularly since this restructuring would take place against the backdrop of the worst and most persistent global economic slowdown in decades. Secondly, how does Mr. Soros see German hegemony being exercized ? Is he in favour of a central body exercizing ultimate political control over the economic and financial policies of the EZ member countries ? Would Germany have a dominant role in some way in this body ? If not, as we have most recently seen in the ECB decision concerning bond purchases, Germany would be impotent to ensure that other members did not slip their leashes. Either way, giving such authority to an unelected, unaccountable group of commissars would effectively be the end of democracy in Europe and it is more than a little ironic to see Mr. Soros, of all people, advocate such a development. Germany seems to be doing its best to combine a wish to see its EZ fellow-members modernize their economies, and to avoid writing them an endless series of blank cheques, with a sense of its responsibility to the ‘European project’. The better of Mr. Soros’ two alternatives would seem to be for Germany to leave the euro to the other members. This would enable the ECB to continue to act as the central bank of the EZ and would give scope for collaboration with a resuscitated Bundesbank to work, in the interests of all the members of the Eurozone economy, towards a realistic and durable solution to the crisis.
It is sad, and more than a little ironic, to see George Soros bewail the abandonment by the European Union of the inspiring goal of an 'open society' while strongly advocating political union (along with fiscal and banking union) as a solution to the present Eurozone crisis. The structures he proposes, besides constituting only a short-term financial fix for the deep-seated economic disparities which lie at the base of the crisis, would be a further and decisive step towards the systematic suppression of democratic accountability in Europe in favour of an authoritarian bureaucratic tyranny. He should perhaps reread The Open Society and Its Enemies.