Soros: The Germans must show

8th June 2012

With a Greek exit looming and the Germans resolutely ignoring Spain's pleas for direct bank access to European bailout vehicles, Soros said the continent has three months to decide. Either it must either rapidly proceed to full political union (which would, of course, require humiliating u-turns in both Berlin and Frankfurt) or face the implosion of the single currency by September 2. The latter outcome would, of course, be horribly messy, with profound and long-lasting global economic/geopolitical fallout.

One could paraphrase Soros's message to Europe's leaders as: "Quit your dithering and endless sequence of Band-Aid solutions and get real if you believe in keeping this European show on the road."

The speech went viral on the internet last weekend, triggering responses from, among others, Business Insider's Joe Wiesenthal, Reuters's Felix Salmon, and the New York Times's Paul Krugman.

Soros, 81, a currency-speculator-turned-philanthropist-turned-economics-reformer, is often remembered in the UK as "the man who broke the Bank of England." So there's a suspicion that he may just be talking his book and hoping to profit handsomely from also breaking the European Central Bank (I personally think this is far-fetched).

In his speech Soros, who saw through the idiocy of neoclassical economics as early as the 1980s, said the thinking behind European Monetary Union was flawed from the outset, given it sought to create a monetary union without a political union, and that this was self-evident long before the Maastricht Treaty was ratified in 1992. He added:

"But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails-and neither did the European authorities."

Soros said it's unfair and hypocritical of "core" eurozone member states such as Germany and France to place all the "blame and burden" of adjusting the eurozone's imbalances on weaker, peripheral countries.

"The "center" is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late."

Given that the core countries were responsible for setting up the whole flawed concept, what right have they to blame the peripheral nations when everything goes pear-shaped? If they hadn't built the euro on such shaky foundations, and if Basel Committee of Banking Supervision had not been insane enough to give a zero risk-weighting to sovereign debt, then the other nations would never have been in the position to borrow as much as they did.

Soros argued that Europe's banks urgently need a pan-European deposit scheme, in order to prevent capital flight, and that they must also be given direct access to the European Stability Mechanism, the eurozone's permanent rescue fund. He added that joint financial supervision and regulation is essential, as are measures to reduce the borrowing costs of heavily indebted European nations.

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More on Mindful Money:

How to survive the Eurozone apocalypse

Draghi: Don't Blame Europe for Global Weakness

Cameron: UK taxpayers won’t bailout Europe’s bad banks

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