INET co-founder George Soros is calling on Germany to lead Europe out of its economic doldrums or get out of monetary union altogether.
In an essay published in the most recent edition of The New York Review of Books and in a speech delivered in Berlin Monday, Soros pins Europe’s fiscal problems on the Maastricht Treaty's failure to create a common European treasury. In the absence of such an institution, Soros believes that it is incumbent upon the wealthy euro-zone creditor nations, particularly Germany, to accept the financial responsibilities of debtor states.
This step would accomplish two key objectives, Soros writes in his essay. One, it would establish a “level playing field” between capital rich creditors and struggling debtors, such as Greece and Italy. And two, it would enable the euro zone to grow its way of its debt problems, although Soros's plan also would require the euro zone to temporarily take on higher levels of inflation.
Currently Germany’s leadership is pursuing policies that Soros believes will hold the euro together for a while. However, they do not represent a permanent solution. This is not good enough, according to Soros, because the European Union that will emerge from this process will be a bifurcated monetary union with a hierarchy divided into two classes: creditors and debtors.
To avoid this fate, Soros believes that it is incumbent upon Germany to either save the euro zone or get out of the way.
“In my judgment the best course of action is to persuade Germany to choose between becoming a benevolent hegemon or leaving the euro,” Soros writes. “In other words, Germany must lead or leave.”
Although Soros believes that there would be some short-term disruptions if Germany left the European Union, if Germany is determined to continue on its current course its departure would ultimately save the euro zone.
“If Germany left, the euro would depreciate,” Soros writes. “The debt burden would remain the same in nominal terms but diminish in real terms. The debtor countries would regain their competitiveness because their exports would become cheaper and their imports more expensive. The value of their real estate would also appreciate in nominal terms, i.e. it would be worth more in depreciated euros. The creditor countries, by contrast, would incur losses on their investments in the euro area and also on their accumulated claims within the euro clearing system. The extent of these losses would depend on the extent of the depreciation; therefore creditor countries would have an interest in keeping the depreciation within bounds.”
To read the entire essay, click the link below.
Comments
Soros is correct about nominal debt and real debt if German left the European Union. But if a major backer and banker of the EU left would not other nations do the same?
I would suggest to Soros that the EU is like Hotel California, you can check-in but never check-out. The disruption would be contagious.
Sincerely,
Paul Cottrell, BSc, MBA
Ph. D. candidate from Walden University
twitter: paulcottrell
YouTube: Paul Cottrell
Whilst I fully agree with Soros' ultimate conclusion of Germany either leading or leaving the Euro zone, some of his statements about Germany and other EU countires need to be put into perspective.
After September 6 (the ECB European Central Bank decides a scheme to acquire unlimited amounts of government bonds of financially distressed member countries) and September 12 (the judgement of the Federal Constitution Court as to the ESM European Stability Mechanism and Fiscal Pact), the European Union in general and Germany in particular are no longer the same. All doors are now wide open to embark on a journey into uncharted financial territories. I am afraid this might ultimately end up in a desaster, and failing that, in a nasty economic agony for some generations to come.
- Germany to become a benevolent hegemon of the EU ?
With due respect to Germany's difficult history it is absolutely out of the question that this country could ever be imagined as a benevolent hegemon of the EU. Neither the German people would want and accept such a role nor would it be acceptable by other EU countries.
Don't forget that Germany is not only a net creditor to other EU countries but also a heavily indebted nation on its own. Some combined € 2,2 trillion of public debt of Bund, Bundesländer and municipalities corresponding to some 85% of GNP is really nothing to write home about. And by far exceeding the original Maastricht criterion of 60%.
- The Bundesbank remaining committed to an outmoded monetary doctrine and asymmetric interpretation of monetary stability ?
- Germany foisting the wrong policy on Europe ?
- The primary responsibility for a policy of austerity pushing Europe into depression lying with Germany ?
- Germany beeing under the spell of false fiscal and monetary doctrines ?
- The passionate if misguided advocacy of the economist Hans-Werner Sinn ?
- Germany being stuck to misconceptions currently guiding its policies ?
- Germany to honor its "Schuld" because it has so much benfitted from the Euro crisis ?
Well, well, this is quite an impressive collection of German bashing, isn't it ? However, very interesting reading as seen from the other side of the Atlantic for someone who is living in this country with being a convinced European and economist by profession.
Okay, the outmoded monetary doctrine of the Bundesbank and false economic policies of the different governments have all contributed to the German Wirtschaftswunder after World War II, have given rise to the solid German Mark up to the introduction of the Euro. And have to some extent also enhanced the economic development since then and during the crisis years from 2007 up to now. Guess why Germany has been enjoying, during the last five years, a relatively better economic faring as compared to its main peers like France, Spain, Italy and Great Britain ?
Germany has not, contrary what Soros and others here in the EU want to make us believe, benefitted from the Euro. Exports into the Euro zone countries, as expressed as a percentage of total exports, were significantly diminishing, exports into non-Euro EU-countris were significantly increasing as were exports to ROW countries. These simple facts have been evidenced by reliable statistical sources.
The Germans hate to foist their outdated albeit quite successful policies, which evidently can't be that wrong, onto other EU countries. It was Sarkozy who wanted some sort of French blueprint of it back home which cost him his presidency. Even Hollande begins to understand, after a while of cool reflections, the rationale behind it. And Monti too, however, I am not so sure about Rajoy. Ireland and Portugal are making substantial progress with varying degrees of austerity policies.
Professor Sinn as one of the leading German economists is the Galileo, Kepler, Copernicus and Newton of modern times all in one person: he dares saying, in the figurative sense, that planet earth is not the hub of the universe, it's body is not flat but a sphere and it turns around the sun. All contrary to the dogged dogmas of the Catholic church at that time. Clearly, a man with such abhorrent misjudgements must be branded.
- Italy, Spain and France could present an economically credible and politically appealing program that would save the common market and recapture the European Union as the idealistic vision that fired people's imagination. The common front could then present Germany with the choice: lead or leave.
This sounds like a wonderful fairy tale to me. Having spent nearly all my holidays with my family in the mentioned countries, mostly at the shores and on islands of the mediterranian, I would agree with Soros' leave-option, however, subject to three conditions: (i) let me pay my future holidays in Deutsch Marks, (ii) don't force me to believe in an economically appealing program for the EU from them, and (iii) let us focus on the charms of latin living, i.e. the art of dolce far niente, good food & wines, splendid climate - and wasn't there something else ?
Which brings me to the crucial crossroads of Soros' suggestions:
No, in my opinion it is not at all imaginable that Germany will ever become a benevolent hegemon of the EU. Germans have tried hegemony twice by means of evil undertakings. All ending up in human catastrophies. So let's better put this idea to bed quickly.
Yes, Germany should finally wake up and opt for the exit. I am very much encouraged by Soros' judgement that Germany leaving the Euro (not necessarily the EU) would be a "disruptive but manageable onetime event". No one here within the EU, let alone in Germany, ever dared to express such an opinion aloud. Although it must be said that when judging the discussion of the cognoscenti and the public at large, I would not be surprised at all if a referendum held to this purpose came up with an impressive majority vote to leave the Euro zone.
It would be an excellent idea if independent economic research would be carried out to assess the potential cost and economic consequences for Germany of such a move. My educated guess is that it would be by far less onerous than embarking on the strategies and tactical meaneuverings as made possible during this month.
Sincerely,
Manfred W. Pühringer
Senior Corporate Finance Advisor
Düsseldorf, Germany
m.w.puehringer@p-cf.de
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