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George Soros’s Three Month Window on Eurozone Crisis Management Is Up

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Three months ago, on June 2, 2012, George Soros gave a widely circulated speech about the Eurozone crisis. He mentioned “three months” four times in the speech.

In my judgment the authorities have a three months’ window during which they could still correct their mistakes and reverse the current trends. By the authorities I mean mainly the German government and the Bundesbank because in a crisis the creditors are in the driver’s seat and nothing can be done without German support.

I expect that the Greek public will be sufficiently frightened by the prospect of expulsion from the European Union that it will give a narrow majority of seats to a coalition that is ready to abide by the current agreement. But no government can meet the conditions so that the Greek crisis is liable to come to a climax in the fall. By that time the German economy will also be weakening so that Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities. That is what creates a three months’ window.

Correcting the mistakes and reversing the trend would require some extraordinary policy measures to bring conditions back closer to normal, and bring relief to the financial markets and the banking system. These measures must, however, conform to the existing treaties. The treaties could then be revised in a calmer atmosphere so that the current imbalances will not recur. It is difficult but not impossible to design some extraordinary measures that would meet these tough requirements. They would have to tackle simultaneously the banking problem and the problem of excessive government debt, because these problems are interlinked. Addressing one without the other, as in the past, will not work.

Banks need a European deposit insurance scheme in order to stem the capital flight. They also need direct financing by the European Stability Mechanism (ESM) which has to go hand-in-hand with eurozone-wide supervision and regulation. The heavily indebted countries need relief on their financing costs. There are various ways to provide it but they all need the active support of the Bundesbank and the German government.

That is where the blockage is. The authorities are working feverishly to come up with a set of proposals in time for the European summit at the end of this month. Based on the current newspaper reports the measures they will propose will cover all the bases I mentioned but they will offer only the minimum on which the various parties can agree while what is needed is a convincing commitment to reverse the trend. That means the measures will again offer some temporary relief but the trends will continue. But we are at an inflection point. After the expiration of the three months’ window the markets will continue to demand more but the authorities will not be able to meet their demands.

It is impossible to predict the eventual outcome. As mentioned before, the gradual reordering of the financial system along national lines could make an orderly breakup of the euro possible in a few years’ time and, if it were not for the social and political dynamics, one could imagine a common market without a common currency. But the trends are clearly non-linear and an earlier breakup is bound to be disorderly. It would almost certainly lead to a collapse of the Schengen Treaty, the common market, and the European Union itself. (It should be remembered that there is an exit mechanism for the European Union but not for the euro.) Unenforceable claims and unsettled grievances would leave Europe worse off than it was at the outset when the project of a united Europe was conceived.

But the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany. It would leave Germany with large unenforceable claims against the periphery countries. The Bundesbank alone will have over a trillion euros of claims arising out of Target2 by the end of this year, in addition to all the intergovernmental obligations. And a return to the Deutschemark would likely price Germany out of its export markets – not to mention the political consequences. So Germany is likely to do what is necessary to preserve the euro – but nothing more. That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments. That would turn the European Union into something very different from what it was when it was a “fantastic object” that fired peoples imagination. It would be a German empire with the periphery as the hinterland.

I believe most of us would find that objectionable but I have a great deal of sympathy with Germany in its present predicament.The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.

The ECB is now apparently pledging “unlimited, sterilized bond buying”, the German Constitutional Court is ruling on whether the ESM is constitutional, and German manufacturing is contracting. Spanish yields are roughly where they were in early June.

And it’s been three months.

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13 comments

  1. kevinearick

    print, buy re, borrow against the re, repeat-how could anything go wrong? in a worst case scenario, just flee and start over in another country, preferably one with lots of nuclear bombs…

    so, the process cuts off the tails, with the remaining gravitational curve of incremental perception falling farther and farther behind the leading tail, which may complete the circuit either through the semi-conductor, or directly to the lagging tail.

    the easiest way to see it is to follow the electron, but doing it is something else all together. naturally, the derivative may only follow the integral.

    Soros would better serve his own cause by limiting his derivative currency exposure, but where would he get the “income” without it?

    if you sell a non-performing asset, with a “market” price inflation of 300%, at original cost, transforming it into income property in the process, just when income becomes the rare commodity at terminal monetary velocity, what is the difference in price? anti-money?

  2. Susan the other

    So we will see how prescient Soros is/was by the end of this week. What a can of worms. Remember, “an exit mechanism exists for the European Union but not for the euro.” That sounds like the euro is going to be held hostage by every EZ country and for a long time. Forget 3-month windows.

  3. OMF

    I don’t believe that the whole thing is going to blow up anytime soon. I don’t because a blow up, or major event of any kind would mean the end of the beginning. It would mean that things could start getting better. I don’t see that happenning by itself anymore.

  4. Susan the other

    Did Merkel just sign a deal with the Chinese so the ECB can buy up sovereign bonds for 3 years and sell them off to China. Thereby buying time for the EU to get it together? Or am I channeling inspector Clouseau again?

  5. jake chase

    The credit worthiness of the periphery was always imaginary. Germany is much like China in that it exchanges real production for worthless money created by exploding credit. The difference is that much of the German production is real and doesn’t fall apart, which makes buying it a much better deal for those who cannot pay and never expected to pay except out of future loans. The Euro jig is pretty much up, with or without austerity. Those continuing to buy periphery debt in the hope of an ECB bailout are the real optimists. Germany fears an inflation whirlwind but is more likely to face a depression. Interesting times these.

  6. craazyman

    Three months here, three months there, pretty soon you’re talking about half a year. Or more!

    As long as somebody keeps talking, nothing ever really ends.

    1. jsn

      That’s what bankers mean when they say ” the economy is fundamentally sound”. If they all just shut up, poof, it all disappears.

  7. Jon H

    Yves,
    Is it necessary to get permission when a speech by George Soros is printed in a post? Is a speech the same as an article with respect to permission?

    Jon

    1. Anomar

      If you look at the amount quoted, it is within fair use, but in any case, the link provided takes you to the full speech posted for free on Soros’ own site. Neither does George seems to care about copyright as he has posted no notices on any of these pages. His books might be a very different thing, but I would think he would want his speeches to get as much exposure as possible.

  8. TC

    “The banking problem and the problem of excessive government debt” are “interlinked” only in the manner that, those ill-regulated mechanisms creating the former likewise facilitated the latter, and only the more so did the latter grow once “the market” was reduced to admitting the former.

    “Addressing one without the other, as in the past, will not work.” That an imperial scammer would state the obvious raises a red flag indicating the intention a supra-national banking dictatorship has in mind, which its servant, Soros, subsequently dutifully reported.

    It’s high time Americans shove the fruits of their Revolution down these hopelessly insolvent, European imperialists’ throats.

  9. Anomar

    Stiglitz says another ‘crash’ is coming now; Soros is speaking the same language.

    Europeans do not want Romney elected, so the theory is they will hold out until the election is over. I don’t understand the timing pressures of these things. In 2008, disaster was hours away? I’m still not completely convinced that was so.

    How could both these guys be wrong? And if they are, who can we even hope to turn to for insight?

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