George Soros: how to save the EU from the euro crisis - the speech in full | Business |... - 0 views
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The crisis has also transformed the European Union into something radically different from what was originally intended. The EU was meant to be a voluntary association of equal states but the crisis has turned it into a hierarchy with Germany and other creditors in charge and the heavily indebted countries relegated to second-class status. While in theory Germany cannot dictate policy, in practice no policy can be proposed without obtaining Germany's permission first.
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Italy now has a majority opposed to the euro and the trend is likely to grow. There is now a real danger that the euro crisis may end up destroying the European Union.
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The answer to the first question is extremely complicated because the euro crisis is extremely complex. It has both a political and a financial dimension. And the financial dimension can be divided into at least three components: a sovereign debt crisis and a banking crisis, as well as divergences in competitiveness
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The crisis is almost entirely self-inflicted. It has the quality of a nightmare.
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My interpretation of the euro crisis is very different from the views prevailing in Germany. I hope that by offering you a different perspective I may get you to reconsider your position before more damage is done. That is my goal in coming here.
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I regarded the European Union as the embodiment of an open society – a voluntary association of equal states who surrendered part of their sovereignty for the common good.
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The process of integration was spearheaded by a small group of far sighted statesmen who recognised that perfection was unattainable and practiced what Karl Popper called piecemeal social engineering. They set themselves limited objectives and firm timelines and then mobilised the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step.
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Unfortunately, the Maastricht treaty was fundamentally flawed. The architects of the euro recognised that it was an incomplete construct: a currency union without a political union. The architects had reason to believe, however, that when the need arose, the political will to take the next step forward could be mobilized. After all, that was how the process of integration had worked until then.
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For instance, the Maastricht Treaty took it for granted that only the public sector could produce chronic deficits because the private sector would always correct its own excesses. The financial crisis of 2007-8 proved that wrong.
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When the Soviet empire started to disintegrate, Germany's leaders realized that reunification was possible only in the context of a more united Europe and they were prepared to make considerable sacrifices to achieve it. When it came to bargaining, they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement.
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The financial crisis also revealed a near fatal defect in the construction of the euro: by creating an independent central bank, member countries became indebted in a currency they did not control. This exposed them to the risk of default.
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Developed countries have no reason to default; they can always print money. Their currency may depreciate in value, but the risk of default is practically nonexistent. By contrast, less developed countries that have to borrow in a foreign currency run the risk of default. To make matters worse, financial markets can actually drive such countries into default through bear raids. The risk of default relegated some member countries to the status of a third world country that became over-indebted in a foreign currency.
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Not quite... Maggie Thatcher, a Conservative; and Gordon Brown, of Labour, both recognized this possible loss of sovereignty (and economic policy weapons they might use to keep the UK afloat), and refused to join the euro.
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The emphasis placed on sovereign credit revealed the hitherto ignored feature of the euro, namely that by creating an independent central bank the euro member countries signed away part of their sovereign status.
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Only at the end of 2009, when the extent of the Greek deficit was revealed, did the financial markets realize that a member country could actually default. But then the markets raised the risk premiums on the weaker countries with a vengeance.
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Then the IMF and the international banking authorities saved the international banking system by lending just enough money to the heavily indebted countries to enable them to avoid default but at the cost of pushing them into a lasting depression. Latin America suffered a lost decade.
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In effect, however, the euro had turned their government bonds into bonds of third world countries that carry the risk of default.
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In retrospect, that was the root cause of the euro crisis.
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The burden of responsibility falls mainly on Germany. The Bundesbank helped design the blueprint for the euro whose defects put Germany into the driver's seat.
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he fact that Greece blatantly broke the rules has helped to support this attitude. But other countries like Spain and Ireland had played by the rules;
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the misfortunes of the heavily indebted countries are largely caused by the rules that govern the euro.
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Well, yes, but this is an extremely big point. If, instead of convergence, we continue to see growth patterns growing apart, what then?
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Germany did not seek the dominant position into which it has been thrust and it is unwilling to accept the obligations and liabilities that go with it.
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Austerity doesn't work.
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As soon as the pressure from the financial markets abated, Germany started to whittle down the promises it had made at the height of the crisis.
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What happened in Cyprus undermined the business model of European banks, which relies heavily on deposits. Until now the authorities went out of their way to protect depositors
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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.
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In this context the German word "Schuld" plays a key role. As you know it means both debt and responsibility or guilt.
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If countries that abide by the fiscal compact were allowed to convert their entire existing stock of government debt into eurobonds, the positive impact would be little short of the miraculous.
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Only the divergences in competitiveness would remain unresolved.
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Germany is opposed to eurobonds on the grounds that once they are introduced there can be no assurance that the so-called periphery countries would not break the rules once again. I believe these fears are misplaced.
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Losing the privilege of issuing eurobonds and having to pay stiff risk premiums would be a powerful inducement to stay in compliance.
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There are also widespread fears that eurobonds would ruin Germany's credit rating. eurobonds are often compared with the Marshall Plan.
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It is up to Germany to decide whether it is willing to authorise eurobonds or not. But it has no right to prevent the heavily indebted countries from escaping their misery by banding together and issuing eurobonds. In other words, if Germany is opposed to eurobonds it should consider leaving the euro and letting the others introduce them.
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Individual countries would still need to undertake structural reforms. Those that fail to do so would turn into permanent pockets of poverty and dependency similar to the ones that persist in many rich countries.
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They would survive on limited support from European Structural Funds and remittances
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Second, the European Union also needs a banking union and eventually a political union.
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If Germany left, the euro would depreciate. The debtor countries would regain their competitiveness. Their debt would diminish in real terms and, if they issued eurobonds, the threat of default would disappear.