10th April 2013
George Soros has set himself up as the official opposition to current Euro orthodoxy. Indeed, one might suggest he is putting forward much more of a radical alternative than any political party in the forthcoming German general election.
Soros wants Germany to embrace Euro wide government bonds which would see the EU shoulder Europe wide debt. As his second choice policy he suggests that Germany leaves. The call comes as some economists such as Invesco’s John Greenwood warn that the EU’s current austerity orthodoxy threatens almost endless recession.
The full text of the Soros speech delivered in Germany is featured on Project Syndicate. The billionaire financier says such Eurobonds would solve a raft of problems. But he also suggests that were the countries of the Euro to band together without Germany it would still have a lower debt to GDP ratio than markets such as the US. But we have included some excerpts below.
The critique of Germany
“The financial problem is that Germany is imposing the wrong policies on the Eurozone. Austerity doesn’t work. You cannot shrink the debt burden by shrinking the budget deficit. The debt burden is a ratio between the accumulated debt and the GDP, both expressed in nominal terms. And in conditions of inadequate demand, budget cuts cause a more than proportionate reduction in the GDP – in technical terms the so-called fiscal multiplier is greater than one.
The German public finds this difficult to understand. The fiscal and structural reforms undertaken by the Schroeder government worked in 2006; why shouldn’t they work for the Eurozone a few years later? The answer is that austerity in a single country works by increasing its exports and reducing imports. When everybody is doing the same thing it simply doesn’t work: it is clearly impossible for all members of the Eurozone to improve their balance of trade with one another.
Why Cyprus deal was wrong and undermines Europe’s banks?
“In the bailout of Cyprus, Germany went too far. In order to minimize the cost of the bailout it insisted on bailing in bank depositors. This was premature. If it had happened after a banking union had been established and the banks recapitalized, it might have been a healthy reform. But it came at a time when the banking system was breaking up into national silos and remained very vulnerable. What happened in Cyprus undermined the business model of European banks, which relies heavily on deposits. Until then the authorities had gone out of their way to protect depositors. Cyprus has changed that. Attention is focused on the devastating impact of the rescue on Cyprus but the impact on the banking system is far more important. Banks will have to pay risk premiums that will fall more heavily on weaker banks and the banks of weaker countries. The insidious link between the cost of sovereign debt and bank debt will be reinforced and a banking union that would reestablish a more level playing field will become even more difficult to attain. Without access to credit on equal terms the periphery countries cannot possibly escape from the trap in which they are caught.”
“If countries that abide by the Fiscal Compact were allowed but not required to convert their entire existing stock of government debt into eurobonds, the positive impact would be little short of the miraculous. The danger of default would disappear and so would the risk premiums. The balance sheets of banks would receive an immediate boost and so would the budgets of the heavily indebted countries because it would cost them less to service their existing stock of government debt.
“Italy, for instance, would save up to four percent of its GDP. Its budget would move into surplus and instead of austerity, there would be room for some fiscal stimulus. The economy would grow and the debt ratio would fall. Most of the seemingly intractable problems would vanish into thin air. Only the divergences in competitiveness would remain unresolved. Individual countries would still need structural reforms, but the main structural defect of the euro would be cured. It would be truly like waking from a nightmare.”
Soros says the impact would be miraculous. If he’s correct, it almost seems like madness not to do it. It might even save everyone money Germany included. Given the depth of German opposition and the perception and actually the reality that they would be paying for everyone else’s spending, it sounds as if it would also require a political miracle too.