George Soros on the Euro

[Jason]

Just published in the FT, an article written by George Soros:
FT.com / Comment / Opinion - The euro will face bigger tests than Greece

Some of the key points are:

• The euro was a unique and unusual construction whose viability is now being tested.
• The construction is patently flawed.
• ... only a Treasury can deal with problems of solvency. This is a well-known fact that should have been clear to everyone involved in the creation of the euro.
• If member countries cannot take the next steps forward, the euro may fall apart.
• But this is politically impossible.
• So makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland.

I find this article the clearest statement about the Euro I've seen. I'm interested to see he feels that a muddle through solution may be possible with Greece, and also that he credits the Greek people with willingness to take the austerity medecine. He sees the blow coming from problems in Spain, Italy, Portugal and Ireland.

George Soros ends by a statement which taken at face value is hedging. "The question is whether the political will for these steps can be generated." This presumably means that if the political will can be found to issue Eurobonds then the Euro can be saved. However elsewhere Soros makes it clear that he does not think this political will exists. And almost certainly such political will indeed does not exist, and is not possible with the Lisbon Treaty as it stands, and is not possible in the near or middle term. Furthermore issue of Eurobonds would de jure make the EU a sovereign state and take away the sovereignty of the 27. Members cannot take the next step forward, therefore the Euro must fall apart.

I also think it is significant that Soros has come out and made this statement as his words will have impact. Arguably he is making things worse by speaking. Possibly he intends to prompt the Eurozone into taking correct action, which is to manage the inevitable breakup rather than follow the act of faith position that the breakup of a patently flawed construction won't happen.

 

[eurotop40]

... Finally, the Bank of England withdrew the currency from the European Exchange Rate Mechanism, devaluing the pound sterling, and Soros earned an estimated US$ 1.1 billion in the process. He was dubbed "the man who broke the Bank of England." In 1997, the UK Treasury estimated the cost of Black Wednesday at £3.4 billion. ...

Where is your patriotism Jason?

 

[798686]

This presumably means that if the political will can be found to issue Eurobonds then the Euro can be saved. However elsewhere Soros makes it clear that he does not think this political will exists. And almost certainly such political will indeed does not exist, and is not possible with the Lisbon Treaty as it stands, and is not possible in the near or middle term. Furthermore issue of Eurobonds would de jure make the EU a sovereign state and take away the sovereignty of the 27. Members cannot take the next step forward, therefore the Euro must fall apart.

The muddle through solution with Greece seems likely (although I change my mind on it daily, lol).

Also, I do think that (unfortunately) they will find the political will to push through the creation of a single economic government (step by step, with limited co-ordinating powers initially?) eventually, with or without the agreement of all the member states.

 

[Jason]

I don't agree that this situation will create a single European government. The two timescales don't work together.

The markets are in turmoil now. We're looking at climax in months at most - possibly days or weeks.

In order to settle them they need a single fiscal policy backed by the issue of bonds direct by the EU. Many in Europe would love this. But Lisbon does not give a framework for such action. It would need a new treaty or constitution, and that would be a complex document, and it would still need ratification by the 27 (the powers granted by Lisbon for the EU to work without reference to the nation states are enormous, but they don't go this far). The timescale is perhaps a decade.

I think it possible we will get some sort of coalition of the willing whereby Greece is bailed out effectively by Germany and others unilaterally guaranteeing the bonds - which is what Greece is calling for (and Greece is stating that this particular bailout wouldn't be a bailout). I guess Soros is suggesting this course is likely. But the problems are elsewhere in Club Med.

Eurotop40 - I'm aware that Soros has a conviction from the French high court for insider dealing and I'm very sure he's not squeaky clean, or even vaguely clean. But as it happens he did the UK an enormous favour in demonstrating the problems with the ERM and ensuring we got out - there was talk of making him a knight. Sir George of Stirling?

 

[faceking]

I would be VERY VERY wary of Soros' commenting on currency/exchange matters. He's an investor, first and foremost. He doesn't want what's best, and more often opines for direction that suits him.

 

[dandelion]

I would be VERY VERY wary of Soros' commenting on currency/exchange matters. He's an investor, first and foremost. He doesn't want what's best, and more often opines for direction that suits him.

Now thats true. Must be looking to make his next billion somewhere. Push the price of Euros about a bit? Can't trust anyone, can you. Shame, since he basically just said Greece would be fine, no problem.

 

[B_talltpaguy]

Where is your patriotism Jason?

Patriotism can't trump mathematical reality.

 

[Jason]

Soros is of course a currency speculator. He probably feels that if politicians are daft enough to make a situation a speculator can exploit then it might as well be him who exploits it. When he drove Sterling out of the ERM he made a fortune - but if he hadn't done it someone else would. Curiously Britain had a decade of uninterupted growth once Soros lanced the boil of the ERM.

Soros is also a philanthropist. He has done a lot to further the development of universities in the former eastern Europe.

These two parts of his character - speculator and philanthropist - can be used to interpret his recent comments:
1) Soros the outstandingly successful currency speculator has a view on currency markets which deserves to be taken very seriously. That doesn't mean he's necessarily right, but he has a coherent and persuasive argument. It's couched in the language of "if politicians do X, then all will be well, otherwise ..." but he and we know politicians cannot do X. Basically the Euro is up a creek without a paddle.
2) Soros the philanthropist is speaking out because he thinks his view is useful. Right now he implies we need politicians to work out strategies to manage the breakdown of the Euro. And he has to be right! The present Euro and Lisbon structures which don't have a proper exit strategy for any single member (let alone several) are as crazy as not putting enough lifeboats on a ship. The Titanic is unsinkable therefore we don't have enough lifeboats. The Euro is unsinkable so we haven't written an exit strategy. At the very least the response to Soros's comments should be that EU politicians start to put in place an exit strategy just in case it is needed. Any exit would be problematic, but whether it is a blip or a catastrophe depends on how it is managed.

 

[dandelion]

You know Jason, sometimes I think you don't like the Euro. I could take it or leave it, it will do fine without any help from me. I think its a brilliant idea. I think it may well outlive the dollar. I think it has every chance of becoming the worlds first universal currency. The advantages of an independant reserve currency are obvious to anyone, particularly those using it as their only currency. It does the job which a currency should do, for example in a situation like the Greek crisis. A good currency is an exchange medium for value. Whatever stupidities the Greek government gets up to, its citizens still own a thing with value. They dont need to buy gold or dollars or diamonds, they have euros. The tail has been wagging the dog here for rather too long. A currency does not exist to help a government out of a crisis it makes for itself. A real currency gives citizens an independence from being tied to a government. They can just get on with it and leave the government to stew. That is the different thing which the Euro introduces. It automatically diminishes the importance of a state because the state can no longer shaft its own citizens by manipulating the currency. States will have to learn to live with this.

 

[eurotop40]

... That is the different thing which the Euro introduces. It automatically diminishes the importance of a state because the state can no longer shaft its own citizens by manipulating the currency. States will have to learn to live with this.

Brilliant observation on the fact that nation states are per se a humbug.

 

[Elmer Gantry]

I'd take anything he says with a grain of salt. He has a long history of planting stories. This is especially suspicious coming on the back of the dubious Lisbon treaty referendum results.

His main beef with the Euro is centered around the lack of power the ECB has over what was left of the nations that comprised the EU. Without the power to enforce extra taxation, debt levels had to be carefully managed and the unlimited use of the printing press is not an option for the ECB as it is with the Fed.

"It is clear what is needed: more intrusive monitoring and institutional arrangements for conditional assistance. A well-organised eurobond market would be desirable. The question is whether the political will for these steps can be generated."

= keys to the printing press?

As Jason said, a lot of people will sit up and listen to this guy. Unfortunately.

 

[eurotop40]

As Jason said, a lot of people will sit up and listen to this guy. Unfortunately.

It seems that some people like the idea that there are banksters around.

 

[dandelion]

Well Jason does go over the top a bit, but some of his wild assertions have made me go off and read a little. I begin to think that governments and theorists have become a little carried away with floating money. The inability to print money to order is not so much a disadvantage of the euro as a design feature. The UK government has been merrily printing away to get rid of some of its debt while it could. The idea is to encourage trade now, but it isnt free. Markets are losing confidence in the UK currency. Eventually the system will catch up and we all pay.

In a universe of infinitely expanding real economic growth you can loose some of that loss of wealth from the printing in future gains of wealth from the economy. But what happens if the growth stops? Not something economists like to talk about. But it will happen. Growth means growth. More people. More oil. More pollution. More food. There are limits and we are starting to see them. People are contemplating a halt to growth. It is very hard to tell, but it might have already happened. In recent years there has been a vast bubble of credit and debt creating virtual growth. If you strip all that out, how much real growth has there been in anyones economy? That recent crisis, the biggest collapse since the 1920's or whatever they like to say, was still the dog that didnt bark. The system is still chugging away making virtual money while the real steel and wheat economy gets smaller every year. Nothing has yet been done to halt the growth of inflated paper assets. Politicians are even praying for more to get them out of this hole. If they make it to better times without the whole system exploding, will any of them then call a halt? If you can't reform the system in bad times and you won't reform it in good, ultimately there will be only one outcome and it is not nice.

His main beef with the Euro is centered around the lack of power the ECB has over what was left of the nations that comprised the EU. Without the power to enforce extra taxation, debt levels had to be carefully managed and the unlimited use of the printing press is not an option for the ECB as it is with the Fed.

As a kid you learn that before you can spend money you have to get it. maybe you can con someone into lending you money which you know you can never pay back, but generally you cant. Governments have got used to the idea that they have a trick, where instead of paying you back the ten dollars they borrowed they will pay you back ten new dollars. New dollars are only worth half what old dollars were, but hey, they make the rules. Governments in the euro arent allowed to pay you in funny money but some don't understand this yet. There is an obvious solution to the crisis caused by bank failures, which is to impose a tax on banks to repay the money. No one has done this yet. Thats all right as far as it goes, if it is felt important at the present to keep liquidity in the banking system, but it has got to stop at some point fast approaching.

"It is clear what is needed: more intrusive monitoring and institutional arrangements for conditional assistance.

Yes. Of banks and financial speculators. But he's right that governments should not be permitted to do as they like running up unpayable debts. Gordon Brown had this friend he liked to call Prudence, who would never spend more than she earned. Think she went on holiday. It is not only euro countries which this advice applies to.
(oh and to be clear, this is not a party point. Gordon Brown did at least have this friend and talk to her sometimes)

 

[midlifebear]

My only real gripe regarding the Euro is that I'm constantly mixing up 1€ and 2€ coins at night when paying for drinks in bars.

 

[Jason]

The inability to print money to order is not so much a disadvantage of the euro as a design feature.

Exactly! It is an integral part of the design of the Euro. It imposes two sorts of criteria on the nation states:

1) They must follow sensible fiscal policies, basically not spending too much more than they earn.
2) They must follow the same fiscal policies.

If they breach (1) they don't have the lifeboats of devaluation/revaluation and quantitative easing and everything gets very nasty very quickly. But if they breach (2) there are also problems. We don't have a clear example right now, but it is possible to see say Germany running a year with a real surplus while France runs 3% defecit. Both are following sensible policies, but the policies are not compatible.

The Euro absolutely requires fiscal union (which means political union) and the intention was that the two would go ahead in parallel. The Euro was specifically designed with features including the inability of nation states to print money in order to require political union. In effect it is a hostage situation. Give us political union or the currency gets it! The big problem is the political union being asked for cannot be given on the timetable of the hostage takers.

 

[D_Tully Tunnelrat]

My only real gripe regarding the Euro is that I'm constantly mixing up 1€ and 2€ coins at night when paying for drinks in bars.

I wish that were the only problem anyone has with the currency!

Unfortunately this currency's final tale will probably be renown more for inter euro country woe, rather than coinage befuddlement owing to the effects from enhanced euro "mixicology."

 

[dandelion]

It imposes two sorts of criteria on the nation states:
1) They must follow sensible fiscal policies, basically not spending too much more than they earn.
2) They must follow the same fiscal policies.

If they breach (1) they don't have the lifeboats of devaluation/revaluation and quantitative easing and everything gets very nasty very quickly. But if they breach (2) there are also problems. We don't have a clear example right now, but it is possible to see say Germany running a year with a real surplus while France runs 3% defecit. Both are following sensible policies, but the policies are not compatible.

I dont understand your two cases. I don't see why anyone would, but why can they not all agree to follow the same stupid fiscal policy?

It seems using a stable currency automatically imposes certain requirement to follow a sensible fiscal policy, which I think amounts to no more than a balanced budget in the long term. You are no longer able to inflate away your debt. I cant for the life of me see why anyone would think this a bad thing.

But within that, if you want to tax more and spend more, or tax less and borrow, thats rather up to you. Countries take different views on this at the moment. They may currently have separate currencies but they nonetheless remain closely coupled. The US UK exchange rate has been basically fixed for decades?, similarly the pound-euro rate.

 

[eurotop40]

The Euro absolutely requires fiscal union (which means political union) and the intention was that the two would go ahead in parallel. The Euro was specifically designed with features including the inability of nation states to print money in order to require political union. In effect it is a hostage situation. Give us political union or the currency gets it! The big problem is the political union being asked for cannot be given on the timetable of the hostage takers.

This is again an antiquated view... Switzerland has the Swiss Franc and basically NO fiscal union (the 26 cantons are sovereign - not in the sense of your Queen - in fiscal policies).