Soros Sees Euro Crisis as a Real Threat, Outlines Steps to Be Taken

Soros Sees Euro Crisis as a Real Threat, Outlines Steps to Be Taken

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November 3, 2011—“The euro crisis has the potential to destroy the cohesion of the European Union,” George Soros said, speaking in Budapest this evening at a lecture on “Reflexivity  at Work in the European Union,” co-sponsored by Central European University and the Institute for New Economic Thinking. “They can still get it right. . . . There is a way to solve the problem but it may be very costly.”

Soros pointed to an original flaw in the creation of the euro: the failure to establish a fiscal union, a common treasury, as a key cause of the current crisis. The creators of the euro, however, knew that they were merely taking one step, “Soros said, and that more steps, toward fiscal union for example, would follow, assuming the political will remained in place. Other shortfalls, such as the prevailing (mistaken) belief that markets tend toward equilibrium, and therefore the private sector can be left to correct its own mistakes, contributed to the current crisis, he said.

The fact that governments were left to guarantee their own banks in 2008 was the first step in a fracturing of the euro zone, Soros said, leading to a lack of political will to support the integration process that had been in place until then.

“This is primarily a banking crisis and a government debt crisis, but the two are interconnected and reinforce each other,” Soros said. “There is a third crisis, which is a political one, because there is a process of disintegration.”

Nevertheless, Soros expressed optimism that euro-zone governments, led by Germany, are taking some of the right steps.

“Had they done earlier what they are willing to do now, the Greek crisis could have been easily contained,” he said. “They were kicking the can down the road but they came to the end of the road.”

With the formation a European Financial Stability Facility (EFSF), he said, “we have the embryo of a common treasury.”

“They are determined to save the euro. They are right to do so. They have no choice. The euro exists. It is imperfect. But you can’t unscramble the omelet,” he said, criticizing those who unrealistically believe that abandoning the euro is a viable option.

Soros later outlined steps he recommended, urging a united leadership and commitment of resources to calm the markets. He advised against recapitalizing banks and guaranteeing sovereign debt, instead advising using the EFSF to guarantee the banking system, urge banks to maintain their loan portfolios and keep credit lines open, increase inspection to reduce risk, and encourage countries such as Italy and Spain to borrow short-term.

As for Greece, Soros recommends an orderly reorganization of debt via the EFSF, warning that Greek banks as well as their depositors must be protected in order to prevent a Europe-wide run on banks.

Soros also warned against Europe-wide austerity measures.

“This is a trap that is the opposite of a bubble –it is a black hole,” he said. “If one country does it, they can readjust, but if every country does it, you get a depression. That is what is facing the European Union even if you contain the financial crisis. The next job is to find a way to stimulate the European economy as a whole.”

Finally, Soros urged a revival of support for the grand European experiment, which can be seen as undergoing a boom-bust process in the political sphere parallel to the economic sphere.

“You’ve got to find a way to reinvent the European project,” he said. “For better or worse, the euro is here to stay. You can’t do without it. But that leads to forcing people to live together, a short-term marriage that doesn’t lead to domestic harmony. There has to be something positive. There was something positive about Europe and there still is. It has to be rekindled on the political level.”


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