INET Founding Sponsor George Soros recently had a commentary piece published in the FT, where he argued against Germany’s proposed solution to the “euro crisis.”
Germany’s solution, Soros notes, “blames the crisis on the debtor countries that have lost competitiveness and run up their debts, and so puts all the burden of adjustment on debtor countries.”
Soros believes that these arrangements are reminiscent of the international banking crisis of 1982, which caused a “lost decade” for Latin America. Unfortunately, these arrangements are motivated by political maneuvers in order to satisfy an increasingly vocal German public – a public that Soros says “has not been told the truth and so is confused.”
The right way to rectify the crisis, Soros believes, is a two-pronged attack:
First, the European financial stability facility must rescue the banking system as well as member states. This will allow the restructuring of sovereign debt without precipitating a banking crisis. The size of the rescue package could stay the same because any amount used for recapitalising or liquidating banks would reduce the amount lent to sovereign states. Bringing the banks under European supervision rather than leaving them in the hands of national authorities would help restore confidence in the banking system.
Second, to create an even playing field, the risk premium on the borrowing costs of countries that abide by the rules will have to be removed. That could be accomplished by converting most sovereign debt into eurobonds; countries would then have to issue their own bonds with collective action clauses and pay the risk premium only on the amounts exceeding the Maastricht criteria. The first step could and should be taken immediately at Thursday’s summit; the second will have to wait. The German public is a long way from accepting it; yet it is needed to re-establish a level playing field. This has to be made clear to give deficit countries hope they can escape from their deficit predicament if they work hard enough at it.
This issue touches on ideas that INET is interested in – especially the interaction between debts and political economy. Make sure you read this recent Money View blog entry about the possible introduction of a joint Eurobond.
You can also browse our New Economic Thinking Page to see related content. Make sure you also check out our new interview with Richard Koo, who touches on some similar topics.
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