Soros on the Crisis and the Euro

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The New York Review of Books has an article by George Soros with his take on the challenges facing the Eurozone. It includes a good, high level recitation of the structural deficiencies in the Eurozone (in particular, its lack of a treasury), the evolution of recent stresses, and suggested remedies. While the initial discussion covers a fair bit of familiar territory, Soros offers some pointed observations. He argues that the Eurozone crisis is mainly a banking crisis, a failure to clean up financial firm balance sheets in the wake of the 2007-2008 meltdown. And he points a finger at Germany for making a difficult situation worse:

The euro is a patently flawed construct, which its architects knew at the time of its creation. They expected its defects to be corrected, if and when they became acute, by the same process that brought the European Union into existence.

The European Union was built by a process of piecemeal social engineering: indeed it is probably the most successful feat of social engineering in history. The architects recognized that perfection is unattainable….They mobilized the political will for a small step forward, knowing full well that when it was accomplished its inadequacy would become apparent and require further steps…

Germany used to be at the heart of the process….After the fall of the Berlin Wall, Germany’s leaders realized that unification was possible only in the context of a united Europe and they were willing to make considerable sacrifices to secure European acceptance….But those days are over. Germany doesn’t feel so rich anymore and doesn’t want to continue serving as the deep pocket for the rest of Europe. This change in attitudes is understandable but it did bring the process of integration to a screeching halt.

Germany now wants to treat the Maastricht Treaty as the scripture that has to be obeyed without any modifications. This is not understandable, because it is in conflict with the incremental method by which the European Union was built. Something has gone fundamentally wrong in Germany’s attitude toward the European Union.

Let me first analyze the defects of the euro and then examine Germany’s attitude. The biggest deficiency in the euro, the absence of a common fiscal policy, is well known. But there is another defect that has received less recognition: a false belief in the stability of financial markets…..

All I need to do is remind you that the introduction of the euro created its own bubble in the countries whose borrowing costs were greatly reduced. Greece abused the privilege by cheating, but Spain didn’t. Spain followed sound macroeconomic policies, maintained its sovereign debt level below the European average, and exercised exemplary supervision over its banking system. Yet it enjoyed a tremendous real estate boom that has turned into a bust resulting in 20 percent unemployment. Now it has to rescue the savings banks, called cajas, and the municipalities. And the entire European banking system is weighed down by bad debts and needs to be recapitalized. The design of the euro did not take this possibility into account.

Another structural flaw in the euro is that it guards only against the danger of inflation and ignores the possibility of deflation….This is due to Germany’s fear of inflation. When Germany agreed to substitute the euro for the Deutschmark it insisted on strong safeguards to maintain the value of the currency. The Maastricht Treaty contained a clause that expressly prohibited bailouts and that ban has been reaffirmed by the German constitutional court. It is this clause that has made the current situation so difficult to deal with.

And this brings me to the gravest defect in the euro’s design: it does not allow for error. It expects member states to abide by the Maastricht criteria—which state that the budget deficit must not exceed 3 percent and total government debt 60 percent of GDP—without establishing an adequate enforcement mechanism. And now that several countries are far away from the Maastricht criteria, there is neither an adjustment mechanism nor an exit mechanism. Now these countries are expected to return to the Maastricht criteria even if such a move sets in motion a deflationary spiral. This is in direct conflict with the lessons learned from the Great Depression of the 1930s, and is liable to push Europe into a period of prolonged stagnation or worse. That will, in turn, generate discontent and social unrest. It is difficult to predict how the anger and frustration will express itself…..xenophobic and nationalistic extremism are already on the rise in countries such as Belgium, the Netherlands, and Italy. In a worst-case scenario, such political trends could undermine democracy and paralyze or even destroy the European Union.

If that were to happen, Germany would have to bear a major share of the responsibility because as the strongest and most creditworthy country it calls the shots. By insisting on pro-cyclical policies, Germany is endangering the European Union. I realize that this is a grave accusation but I am afraid it is justified.

To be sure, Germany cannot be blamed for wanting a strong currency and a balanced budget. But it can be blamed for imposing its predilection on other countries that have different needs and preferences—like Procrustes, who forced other people to lie in his bed and stretched them or cut off their legs to make them fit. The Procrustes bed being inflicted on the eurozone is called deflation.

Unfortunately Germany does not realize what it is doing. It has no desire to impose its will on Europe; all it wants to do is to maintain its competitiveness and avoid becoming the deep pocket for the rest of Europe. But as the strongest and most creditworthy country, it is in the driver’s seat. As a result Germany objectively determines the financial and macroeconomic policies of the eurozone without being subjectively aware of it. When all the member countries try to be like Germany they are bound to send the eurozone into a deflationary spiral. That is the effect of the policies pursued by Germany and—since Germany is in the driver’s seat—these are the policies imposed on the eurozone.

The German public does not understand why it should be blamed for the troubles of the eurozone. After all, it is the most successful economy in Europe, fully capable of competing in world markets. The troubles of the eurozone feel like a burden weighing Germany down. It is difficult to see what would change this perception because the troubles of the eurozone are depressing the euro and, being the most competitive of the countries in the eurozone, Germany benefits the most. As a result Germany is likely to feel the least pain of all the member states.

Yves here. The last comment is a crucial observation. Even though Germans may indeed be choose to wear the deflation hairshirt, they seem unwilling or unable to recognize that other Eurozone member states will take even more pain, and their populations may rebel rather than accede. Not only is this deflationary liebestod dubious from an economic economic perspective, but it is risky political business as well.

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  1. Captain Teeb

    As the only large net contributor to the EU, Germany is the EU. If it stops paying in more than it receives, the EU is over (unless you think that the net recipient countries will step up to the plate). People in Germany realize this and are willing to express their displeasure at the polls.

    The EU is a profoundly anti-democratic institution. The Lisbon Treaty and the EU itself were shoved through without national referenda. (The Dutch and French rejections of the previous treaty effort were ignored.) This is what Soros supports; take heed, and see him as a negative indicator (i.e., he speaks for TPTB) who is talking his book.

    1. Diego Méndez

      If the EU is undemocratic because it wasn’t backed by referenda, may we check other undemocratic institutions and policies?

      Central banks
      Labor-market reforms
      Austerity packages
      Almost any war in the last 20 years
      Financial liberalization
      etc. etc.

      By the way, didn’t you know that referenda are constitutionally prohibited in Germany?

      The way to express your anger at any policy, war or institution is through democractic elections and the respective opposing parties.

      Continental European did not massively vote for anti-EU measures. That’s the end of the legitimacy debate.

      Regarding net contributions, well, the EU is not only a medium-term investment, but a long-term political project. It’s German unification but on a very large scale.

      You may back it or oppose it, but don’t do it on economic terms. Unless you want it to stay only economic, which a majority of Europeans don’t.

      1. Captain Teeb

        You’re right about the central banks, NATO, etc., but those institutions don’t claim to be democratic. The EU does cloak itself in democratic legitimacy, however. If national referenda gave the right answer, don’t you think we’d have them? The populations are not consulted because the elite knows what the answer will be.

        On referenda in Germany, a quick search turned this up:
        Apparently, they’re working on re-introducing referenda. But I notice that you don’t address the other countries. Look how the EU treated Ireland after they said ‘no’.

        As for a majority of EU citizens (of which I am Irish) wanting ‘ever-closer union’, how will we know if we don’t vote on it? I’m sure our betters at the EU will inform us that it’s for our own good. Pay your taxes and shut up.

        So, the EU is a long-term investment for Germany, eh? Buy and hold, that’s the ticket. How’s that working out for them? You think those Club Med bonds will be paid off?

        The EU is a sham that surfed the fat years and had no plan for the lean ones (like Club Med). Its breakup could be the silver lining in this crisis.

        1. Diego Méndez

          Captain Teeb,

          if Ireland (or any other country) doesn’t like the way the EU is taking, its people can vote for anti-EU parties and get out of the EU.

          After half a century, no country (except colonial Greenland) has gotten out of it. People all over the EU have systematically voted for pro-EU parties and against anti-EU parties for several decades now.

          You obviously cannot manage a 27-nation bloc going forward if every detail has to be approved through referenda by any and all countries. *Nothing* would be approved that way.

          Ireland backed the Treaty of Lisbon as did any of the other 26 EU countries, through a democratically elected Parliament. If that’s undemocratic, then all laws coming from your Parliament are undemocratic, too.

          1. Captain Teeb

            Treaties are details?

            In the age of mega-banking and bloated state sectors, parliaments can be bought off. One need look no further than the US for confirmation of politicians who kow-tow to banks. The Greek bailout went straight to the coffers of French and German banks; the politicians know who matters and who doesn’t.

            My earlier posts were short-sighted. Democracy has reached its limit. When 51% of voters are dependent on state largesse, the continuation of this largesse will be the only criteria when they cast their ballots. Thus is the prospect of reform via ballot box lost. We are locked into a collision with whatever happens to fail first.

            Soros uses words like ‘xenophobia’ and ‘extremism’ with no indication of what he means. It’s hard to immigrate to New Zealand, but does anyone call it xenophobic? I think that Soros applies these labels to anyone who is anti-EU, which is an intellectually-dishonest rhetorical trick (not that he’s the only one doing this, mind you).

          2. Diego Méndez

            Captain Tebb,

            you are right that the European Union is not as democratic as a 100-people self-ruling town.

            But it’s as democratic as something of its size can be, barring systems that would paralyze the whole machine.

            What you point out is an example of Dani Rodrik’s trifecta:

            “This is indeed a reflection of what I have called the “globalization trilemma”: if you consider three worthwhile goals –namely, 1. Globalization (i.e. national borders not imposing relevant transaction costs), 2.The preservation of nation-states, and 3. Political democracy in each country (i.e. politician responding to voters´wishes)- only two of them can simultaneously be achieved.”


        2. reskeptical

          The EU is not going to fail– some countries, which are unable to improve their competitiveness enough may have to leave the EU– but for most countries, including Germany, the EU represents a great improvement on the past and a crucial strategic development for the future.

          There’s quite a difference between management and the democratic process. This is almost the same duality as between the ‘free-market’ and democracy. And by that I mean that the free market ideology is a (bad) management system moonlighting as efficient, liberal, democratic, etc.

          Who’s to blame for Ireland’s economic troubles? Certainly no the EU, I would have thought? Ireland’s economy was badly managed and like so many other countries, Ireland’s political system failed to make the decisions necessary for managing the economy in the face of private business and in particular the financial industry.

          1. reskeptical

            More ‘democracy’ would actually include an increase in real wages in line with the productivity increases of the recent past. But the governments of the developed countries (and the USA in particular) are beholden to special interest groups, who hope to maintain their power –especially in their attempt to access developing markets.

        3. Externality

          “This is indeed a reflection of what I have called the “globalization trilemma”: if you consider three worthwhile goals –namely, 1. Globalization (i.e. national borders not imposing relevant transaction costs), 2.The preservation of nation-states, and 3. Political democracy in each country (i.e. politician responding to voters´wishes)- only two of them can simultaneously be achieved.”

          The problem is that most citizens of the US and other countries want (2) and (3) while the countries’ elites seem to want to force through (1) and (2).

          For a rather wonkish explanation of multinational working groups of appointed officials are bypassing traditional democratic institutions, read ___Anti-Drugs Policies of the European Union: Transnational Decision-Making and the Politics of Expertise___

          The book as two main themes: (1) That policy really is set, not by elected officials, but by multinational groups of ministers and experts who are immune to “populist” arguments. Populations and elected officials are considered too uneducated to know what is best. (2) As governments lose the ability to act internationally, they will increasing assert their authority by regulating their citizens’ day-to-day conduct. Governments are essentially acting like a parent, who losing authority at work, comes home and beats the kids so they can still feel in charge.

  2. Diego Méndez

    The European problem is not economic in nature, but political.

    If economic forecasts are difficult to make, political forecasts are simply impossible.

    That’s why it’s bold, too bold, to say Greece will default, Spanish cajas won’t be re-capitalized, or Germany won’t accept higher inflation.

    Time will tell, but I can’t see Germans protesting against a 20% compulsory salary raise.

    1. reskeptical


      I believe that in some ways Germany could well be the future for the west– increased productivity, lower wages, longer hours in an attempt to maintain the current standard of living. The financial tricks of the USA will not by themselves be enough to prevent the balance of power increasingly moving towards Asia.

  3. dsawy

    It is ironic that Soros, of ALL people in the financial markets, should be telling Germany to use their economic weight to shove the rest of Europe around.

    Does Soros not realize that after that little bit of unpleasantness from 1939 to 1945, the German national character changed to make sure that they do not appear to be running even a part of Europe outside their borders?

    1. Yves Smith Post author

      Um, did you actually read the post? Soros is criticizing Germany for making the other Eurozone members adhere to its preferred policies.

      1. reskeptical

        A counter interpretation is that Germany is asking the other EU countries to respect the agreement that they made on entering the EU. To be responsible. To increase their productivity– it is false to look at Germany through the lens of Austrian economics, when 50+% of wages here goes towards paying taxes! And still there isn’t enough money in the piggy bank to meet the social security needs of this country.

      2. dsawy

        Yes, I did.

        Germany doesn’t want to be accused of trying to re-establish hegemony over Europe, which Soros notes. The Greeks are making accusations already. The Germans can (rightfully) respond: “We signed this treaty, YOU signed this treaty, we both knew what the terms were when we signed it, nicht wahr?” By following the treaty to the letter, there can be no accusations that Germany is forcing the other nations to do Germany’s bidding or will.

        If the Germans started to bend the rules or free-lance, using “emergent circumstances” as the reason… you can bet your last dollar that there will be charges and resentment against Germany if the Germans benefit in the least from having bailed any other nation out.

        Lastly, again, Soros is the LAST person to be offering this sort of advice. Soros is (in)famous for having profited greatly from attacking the currency of nations with great profit for himself. What leader of ANY country would not have that history in the back of their mind whilst reading these soothing words of advice from Soros?

        If I were in Merkel’s government, I’d be reading this and wondering “So what does Soros have for positions on the Euro or our bank debt?”

        1. beware the illuminati

          ‘He’s talking his book’ is a peculiarly petit bourgeois reaction to Soros. Do you really think he worries about his nest egg? There may be no one else on earth better able to adapt indifferently to the wisest policies, or the stupidest. He’s made his pile and now he’s going back to the idealistic egghead passions of his youth. The guy’s smart and he’s worth a listen, full stop.

          1. Piero

            The fact that someone such as Soros doesn’t worry about his next meal or need his next paycheck does not particularly dissuade someone like that from “talking his book”.

            The example that comes to mind was Warren Buffet saying how he thought abolishing the estate tax was a very bad idea. His company, Bershire Hathaway, has done terrifically well over the years eating small companies that had to be sold because the owner died and the estate tax was bearing down on the survivors. Did Buffet *need* to swallow more family owned companies that had to be sold? No. But he spoke for the continuation of what helped him.

            Absent a demonstration to the contrary it seems wiser to expect that human nature including concern with one’s own interests is present even among the very rich.

          2. borkman

            1. Ad hominem

            2. Bad reasoning from analogy with a single data point.

            – Buffett’s favorite activity, save maybe playing bridge, is investing. Soros always regarded investing as second class, he always wanted to be a philosopher and leave his footprints in the sands of time.

            – Buffett is an investor, holds big visible positions long term. Soros is a trader, famous for having no attachment to his positions, being willing to abandon them or take reverse bet when conditions change

            – Soros retired, had to come back due to mgt. problems at his fund. Has also said he does not understand many of the markets and instruments now

            3. Talking your book…in the New York Review of Books? Are you nuts?

    2. Diego Méndez

      Germany has a big influence in the EU and Germany has pushed very hard to get an even greater influence since unification, e.g. Maastricht Treaty (imposing German-style governance at EU level), Lisbon Treaty (increasing German influence on EU-sanctioned policies), or right now, in the financial crisis, imposing austerity and reforms on several EU countries.

      And Germans are right to do it. The EU is a shared-sovereignity project; if other EU countries have a say on how Germany is ruled (and they do), then Germany has a say on other countries’ business.

    3. RagingDebate

      Very good point. However, Soros is right that Germany is in the drivers seat. It is a de facto situation. France slinked off as usual at the first hint of trouble.

      Here is how the bankers think and act. If Germany doesn’t play ball perhaps a war would unite the European continent.

      Maybe this time around JPM and Sachs will fund the Russians to help unite Europe and America can crank up war time production like the run-up to WWII.

      It sounds tin-foil to those of us with restrain but not to Kingmakers. Whether that scenerio unfolds or some other violent unpleasantry, it is this that Soros most likely fears based on his experiences as a young man. It is the nuclear age. I don’t believe Soros is merely talking his book. That is more like China. He isn’t happy with those deteriorating relationship between Bejiing and Washington, Google the Budapest lectures.

      1. Waco

        We know the USA is not doing too well when francophobia is rising. Another chapter in the unfolding collapse of your country probably. If you were well informed, you would have known that behind every decision in the EU there is always the French, they have created it 50 years ago and now it is amplified by the entire European union, a power house which has become a big France. The horror for an average anti-French American. You’ve always been ignorant by essence.

  4. marco

    And the solution is? Spend like there is not tomorrow for germany? Does that solve the competitive problem of the south of Europe?
    I think Europe has a big problem, it would be nice toe hear viable solutions. Making germany less competitive on the world market is in my view not one of them.

    I also want to point out the following. The dutch state lend 5 year money for aroind 3%. Europe (and also Holland) is lending it for 5 % to Greece. there are people screaming that we make a profit on the back of the poor Greeks. But that isn’t true at all. Before the euro the greek state paid 15-20 % interest, and now they pay 5 %. so they pay 10 to 15 procent less then they normally would. The are the ones who (once again) profit from the EU.

    Marco (from holland)

    1. Diego Méndez

      Some possible solutions: higher inflation at the EU level, a central Treasury, fiscal transfers, EU/eurozone bonds, EU economic governance.

      The problem with Southern Europe is wages shot up during the boom times, and they cannot devalue now. So let’s the rest of Europe get a bit of inflation, so there is a devaluation in real terms restoring SE competitivity.

      Let’s not be short-sighted. You cannot be sure whether you’ll need Southern Europe to bail out the Netherlands 30 years from now.

      1. Captain Teeb

        “You cannot be sure whether you’ll need Southern Europe to bail out the Netherlands 30 years from now.”

        No, but that’s not the way to bet. Holland has been a prosperous culture for the last 400 years, and that’s unlikely to change. They export to the world, and have been doing so since sailing ships replaced cogs and galleys.

        How many centuries has it been since Italy, Spain, Greece, or Portugal was rich enough to bail out anyone? About the same: 400 years. I’ll go with the trend, and I think that the Dutch will, too.

        1. Diego Méndez

          How many of the last 400 years were the Europeans and the Dutch at peace?

          If you bet against European solidarity, don’t forget that historical trend, too.

  5. Hubert

    Soros has solid arguments. One could reduce them to listen EU/Euroland: “Inflate or die”.
    Still it is very much a top-down-approach to a very diverse area. The biggest problem is not mentionned: Corruption.
    Now every country is corrupt, but there are definite differences of scale.
    If Soros thinks Germans will pay for Greek state deficits indefinitely, he will be wrong sooner or later. If he thinks some institution can change Greece from the outside, he will be dissapointed too. There is not much time/leeway between these two statements.
    As the same goes somewhat descending extent for the Balcans, Spain, Italy, Portugal – Germans have to ask if they are only pouring their life-savings down several Southern Ratholes to only prolong the agony of the EU.
    His thought experiment of Germany dropping out of the Euro looks very dangerous indeed but it might be a fairer scheme: The BUndesbank would have to take Euros (in FOREX interventions), but at least they could chose from what country (NOT Greece). It would be a big mess indeed.
    Soros argues for a can-kicking-down-the-road strategy sponsored by Germany. And he may be right…
    But if one is more pessimist and thinks the whole Euro project is going to hit the fan anyway, why make an even bigger mess out of it? How high is the risk that the EU could still survive the “Eurocalypse now” scenario but not the “Eurocalypse later” one?

    1. Diego Méndez

      Let’s reform the EU so it has real authority: a real Treasury and real power to pre-approve national budgets and other national frameworks (labour market, housing, credit market, etc.).

      Again, the problem is people are taking an economic approach to the EU (“give me my money back”), when the EU/euro is a *political* enterprise.

      People are taking things like peace and tolerance for granted.

      1. Piero

        They attempted that single treasury system 70 years ago. It was to be called “Germany”.

        1. Diego Méndez

          The difference is: now the peoples of Europe are building that system together, peacefully and democratically.

          That’s a big difference, if you ask me.

  6. attempter

    The German public does not understand why it should be blamed for the troubles of the eurozone. After all, it is the most successful economy in Europe, fully capable of competing in world markets. The troubles of the eurozone feel like a burden weighing Germany down. It is difficult to see what would change this perception because the troubles of the eurozone are depressing the euro and, being the most competitive of the countries in the eurozone, Germany benefits the most. As a result Germany is likely to feel the least pain of all the member states.

    Yup, there’s that same teabag attitude again. Germany is “successful” in large part because it rigged a reckless system to its own benefit while externalizing the location of where the fallout would commence.

    But they’re really at least as responsible for it as anyone, and probably most so. Who financed all these “Club Med” bubbles? Um, on it’s face it’s obvious that if these alleged reckless borrower countries owe much of the debt to German banks, then it follows that the Germans were at least reckless lenders, and probably predatory ones.

    But as always, those in the power position, who by definition are the drivers of the process, and are therefore most responsible for it, turn around and whine like little babies when the thing starts falling apart, wanting to place all the blame on those who were at most their junior partners, and perhaps really their victims.

    (And then there’s the wannabe chorus, losers and victims or soon-to-be victims themselves, who identify with this whiny nabob.)

    It’s like a coke dealer who snorts his own stuff. They shifted the locality where the unravelling begins (but it’s still just as much their own unravelling), and then seem to really believe their own ideological fraud, that wherever the symptoms appear, that’s where the causality lies. It’s downright medieval thinking.

    Imagine if they were doctors……

    1. Hubert

      Russ, “predatory” lender for German Landesbanken – that is somewhat over the top. They got a few basis point above Bunds for taking incredible risks. And they will not get payed back, at least not with real money.
      So “stupid”, yes and “reckless” definitely. But “predatory”?
      And “rigging the system to Germanys benefit”? What benefit? We sold mostly real goods and will mostly hold worthless paper ad infinitum.
      Berlin is not Washington – it is really more stupid & well-meaning than cunning & predatory. I wish they were (only somewhat) less so. Germans are out of the “imperial business” for 65 years now….. and most would like to keep that advantage…

      1. attempter

        OK, I’m willing to go with reckless and stupid.

        But as for rigging the system, how could one currency possibly be properly valued across the entire Eurozone? On its face that’s a highly suspicious concept. And today we know the main point of the Eurozone was to set up a currency which was intrinsically pre-manipulated for the benefit of German exports vis other parts of the zone, especially the Med countries. They were set up to become terminal borrowers.

        The main difference from the Chimerica construct is that places like Greece didn’t go into it with the same malicious intent to destroy all real Greek jobs the way the US system went into globalization. But in the end that’s what it’s come to anyway.

        But Germany’s caught in its own trap, since the Eurozone definitely can’t be “decoupled” even for a little while. But that doesn’t matter to the German elites anyway since, as we already see, the Merkel government is rushing ahead with the liquidation process of “austerity” at the same moment it pretends to blame the profligate Greeks and demands payment. A combo of shock doctrine with the ol’ xenophobia misdirection. I imagine the debtor Greeks won’t be so successful with any similar political attack (like the way Obama/Krugman have been haltingly trying to get going vis China).

        Maybe in the end the Chinese middle class will be the last one liquidated.

        1. Pefect Stranger

          Excellent post, attempter.

          There is hegemony of Germany in Europe. In worst sense of that word. Actually, right word would be colonialism and enslavement of “peripheral” countries (where the exploitation of labor is more intense) those who has entered in EU with far weaker starting point.

          Three quarters of its export, German products and goods find market in EU. Asia 14%; USA 10%

          There is pattern of neocolonial type of the trade.

          Nicolas-Jean Brehon of Le Monde wrote: “Since 1957, the net contribution of [Germany] to the EU budget amounted to … EUR 250 billion. This amount seems large in absolute terms, but represents only 5 billion a year, little to GDP ratio, or the amount of intra-community. So far, less money than it has established its dominance in Europe.”

          Structural Funds of EU, is the main tool for economic development in less prosperous countries, is 800 billions. Yet this money is not allowed to be used for restructuring economy of country recipient to make them less vulnerable to economic shocks.

          German version of neo-liberal economy, which is ordo-liberalism is imposed on the rest of Europe relentlessly and it has been formalized in Lisbon Treaty.

          1. PDC

            “colonialism and enslavement of “peripheral” countries”????
            Frankly speaking, Pefect Stranger (sic) this is beyond insane. You should not confuse success with exploitation. German economic achievements are the results of hard work, discipline, self-confidence and social peace. Germans can be short-sighted, arrogant and selfish, but there is no “colonialism” or “enslavement” of anybody.

          2. Alan

            “You should not confuse success with exploitation. German economic achievements are the results of hard work, discipline, self-confidence and social peace. Germans can be short-sighted, arrogant and selfish, but there is no “colonialism” or “enslavement” of anybody.”

            Success is not always entirely due to hard work. It can also be due to crowding out your competitors and creating barriers to entry.

            Germany, as the bulwark against the Soviets, received a great deal of aid to rebuild its industrial infrastructure. It is not beyond reason to believe that the German industrial base grew to its current dominant form in part because of US strategic preferences and policies.

            Once an industrial base has been established all it has to do is remain competitive and it will be very difficult to dislodge. This is the position that Germany occupies now, and it is very unfair of them to pretend that it is all due to hard work. In fact, they don’t work very hard compared with most other countries – this is because they are basically extracting rents from the barriers to entry that the US helped construct.

            Keynes once recommended that countries in surplus place their foreign reserves into an IMF-like institution. These reserves could be drawn on to purchase goods from abroad, but the surpluses would gradually decline over time. It is a way of taxing the surplus countries — much in the same way as surplus states are taxed in the US to provide investment opportunities in the deficit states through transfer spending.

          3. PDC

            @ Alan

            I agree with you that:
            “Success … can also be due to crowding out your competitors and creating barriers to entry.”
            “Germany … received a great deal of aid to rebuild its industrial infrastructure.”

            Still, I’d like to remember you that in 1945 Germany was just a pile of rubble.

            Allow me to disagree with you when you say: “… they don’t work very hard compared with most other countries – this is because they are basically extracting rents”
            Yes, they don’t work very much compared with some other countries, and this for several reasons, including a better organization, a more just society and an healthy love of free time.
            And the fact that they make several high value products better than others.

          4. reskeptical

            Alan, what definition of ‘work’ are using when you claim that German’s don’t work hard? Seems like an extraordinary claim about a country that is one of the largest exporters in the world.

          5. Alan

            OOPS. Helps to read the link before I post it. Let’s dig harder…


            This shows Germany clocking in around 1362 hours/year. USA around 1777. That is a significant difference. Since 5 weeks is standard vacation in Germany, this article shows Germany working just under 30 hours/week on average.


            This paper


            OECD data is similar. Germany around 1444, and USA around 1861.

            So to conclude that Germans work harder is not correct if by “harder” you mean longer hours.

            There are a number of papers out there trying to understand why workers in some countries can work less and produce more. Here is a good paper that discusses some of the issues.


            The problem with this literature (imho) is that it does not incorporate important factors such as market organization from which economic rent can be extracted.

          6. reskeptical

            Great that you replied!

            This is actually a topic here in Germany atm.– one of the issues is that a significant proportion of the population here don’t work full-time. A lot of my friends work between 50-75% of a full-time position. Those that do work full-time often work 60+ hours, although ‘officially’ they are only getting paid for approx. 40hrs. It’s very difficult to get accurate data in this area, which would allow you to accurately compare countries.

            Also we need to change the focus from hours worked per annum to a metric, which as you say, more reflects efficiency.

            My personal experience, is that the effort and the conscientious way Germans work (as a generalization) is really impressive. They’re really not just working to make money– but that’s only anecdotal.

            But, in general, I think we have to get away from the idea of making money and somehow find a better incentive for ‘producing wealth’.

            One of the other vids from the RSA link from last week:

  7. sean

    There are other imbalances which have developed besides the one with Germany and the peripheral countries.

    Free movement of labour has meant that the ‘PIIGS’ countries attracted massive flows of labour into their countries when they boomed from the East European accession states when the NICE treaty was enacted in 2004.

    None of the accession staes were then in the eurozone and only one is now.Their respective currencies are free floating with the exception of Latvia which is pegged to the Euro.
    Money earned in euros and repatriated to the accession states can have a purchasing power many times over what it has within the eurozone.
    This has lead to socially destructive anomalies ( and bitter resentment among indigenous populations).
    In Ireland ,where I live the unemployment rate is now ,and has been for a couple of years several percentage points above the Polish unemployment rate.Yet still large numbers of Poles immigrate to Ireland .There is a crazy welfare system here which is overly generous and which must be equally applied to all europeans under EU law.
    During the recent ash cloud problem when flights were cancelled thousands of East Europeans never signed on to collect their Dole money and the authorities have stated that many are living in places like Poland and flying in on cheap flights to collect welfare money.
    If they have children they can also collect child welfare allowance.The childrens allowance paid by the Irish State for one month is the equivalent of a living wage in Poland.

    In U.S. terms this would be the equivalent of allowing all South American States citizens the right to work in the US and collect social welfare and repatriate same to countries where the the GDP per head and the cost of living is a fraction of what it is in the U.S.

    Needless to say,virtually no one from the eurozone countries will work in the accession states because the standard of living is much less and also repatriated money into euros is effectively worthless.

    So regardless of employment prospects in respective countires the movement of labour has been and will continue to be only in one direction fostering more resentment.

    This is a big problem in the PIIGS counties but little is written about it because of charges of racism.However it must be acknowledged as it is driving further citizen alienation from the EU.

    1. Captain Teeb

      Hi Sean,

      I too am Irish, but living in Brussels. I’ve also lived in Germany.

      “This is a big problem in the PIIGS counties but little is written about it because of charges of racism.However it must be acknowledged as it is driving further citizen alienation from the EU.”

      That’s the point of my post above. The EU elite suppresses dissent and resentment, of which there is plenty in the ‘payer’ countries.

      Political union is more than just a bureaucracy. Hell, even Belgium is not a ‘nation’ in the sense of having a shared language. How much less, then, is ‘Europe’?

    2. PDC

      Yes, poor people are always an inconvenience, especially when they have the same rights of the rich…
      The funny thing is that mass migration is probably basically unrelated to the existence of EU, but EU has become the ideal scapegoat for it.
      “You see? Now that we are in Europe we must accept those ragged people…”
      I owe that, without the EU, we would probably have less inter-European migration and MORE immigration from Africa, Asia and South America.

    3. Vinny


      Many of the Easter Europeans working in Ireland also happen to be highly-skilled professionals, such as dentists, surgeons, and engineers. Without these professionals, Ireland could hardly remain competitive (unless we’re speaking of drinking competitions here…)

      However, ever since this crisis began, the trend has been for these highly-skilled Eastern Europeans to return to their countries of origin and start businesses there. I know a number of Polish and Romanian dentists who formerly worked in Ireland or the UK, and have since returned to their countries. They now own successful dental practices, earning significantly more than they did when working abroad.

      My point is, you are making generalizations based on old and outdated information. These “accession states”, as you called them, did not stand still, rather have advanced, very much like China has advanced in comparison to the US. Their citizens have made sacrifices by working in the West, lived spartan lives, saved lots and lots of the money they rightfully earned with the sweat of their brow, and now have invested in their own countries. These accession states have been rapidly catching up to (and even surpassing) some Western nations (PIIGS ones in particular).

      Furthermore, Ireland in particular is in no position to point fingers at nations that are simply trying to emulate its success. As I recall, Ireland has a very long history of membership into the Third World Club, and its citizens have emigrated to places such as the US for generations in order to escape poverty and famine.

      Finally, before trying to blame Ireland’s current problems on Polish folks flying in on budget airlines to pick up their fat Irish welfare checks (which to any reasonable person sounds ridiculous), I would take a closer look at the massive corruption that Ireland represents, as well as the current trend of native Irish people to skip college or training for a useful job.

      Food for thought…


      1. Diego Méndez


        I must agree with you.

        Xenophobic attitudes tend to rise on times of economic crisis. They are easy, stupid and unfair.

        Let them come here and compete with us. Let them inject their poison and their cure in our families, culture and economy.

        All real progress starts with the meeting of two people from very different backgrounds.

  8. Viator

    “Spain followed sound macroeconomic policies, ….and exercised exemplary supervision over its banking system.”

    That’s a good one.

    “mergers between wobblier cajas, which are unlisted and make up close to HALF OF SPAIN’s financial system by assets, are merely a first step in a longer process.”

    The caja’s are rife with corruption, nepotism, political favoritism and are many times run by politicians, Spanish autonomous communities, unions and the church. They have been handing out money to favorite clients for years.

    “Caja de Ahorros de Gipuzkoa y San Sebastian SA – a savings bank in northern Spain popularly known as La Kutxa – has sold 2.5 billion euros of mortgage-backed bonds since the end of 2005. Kutxa also gained a certain notoriety inside Spain when it became the first domestic bank to offer mortgages with fifty year terms – you know, the ones you can pass on to your children, now that is what I call leveraging! Purchasers of Kutxa bonds have included investment wholesalers like Newport Beach, California, based Pimco and Pioneer Investments, based in Boston Massachusetts, who both bought the bonds for their funds which are sold to investors around the world.”

    I recommend reading Hugh if you want to know what is going on in Spain

    1. Diego Méndez


      “Spain followed sound macroeconomic policies, ….and exercised exemplary supervision over its banking system.”

      Soros must know what he’s talking about. On fiscal discipline, Spain turned its deficit from 7% in the 90s into a 2% superavit in the 2007, all the while reducing taxes.

      Now we can argue Spain should have been even more prudent, with superavits around 10%, but no country has ever done that before.

      Regarding cajas, you cite total assets as if every caja were insolvent. You can’t compare CajaMadrid or La Caixa, which are as sound as the bigger banks and have important stakes in industrial companies (energy, chemicals), with the smaller, more politicized cajas, which mainly invested on local real estate.

      By the way, a new law will let private capital take over the cajas and will forbid politicians from having any post at a caja. Cleaning up is being made, unlike elsewhere.

      If you don’t like the ties between financials and politicians, you may want to take a look at how Goldman Sachs and the US Administrations fare in this issue.

      1. Viator

        As far as Goldman Sachs goes you will find that I will be the last person to defend them, they can take care of themselves.

        As far as the US Administration(s), they have plenty of sins to go around. But I was talking about Spain and Soros.

        US taxpayers, via the IMF and the dollar swap window at the fed, just helicoptered many, many billions of dollars into Europe and Spain got, or will get, some of that.

        1. Diego Méndez

          Funny how you characterize Spain as getting US money when, in fact, Spain is contributing to IMF bailouts and to the Greek bailout and has not received a single cent from the IMF.

          Not that Spain needs it, with one of the lowest debt to GDP ratios among advanced economies.

          Moreover, it’s Spanish banks (e.g. Santander) that have bought much of the US bankrupt banking system, hence injecting capital in there…

          1. Joseph

            good heavens
            this reply is for you and Viator all together
            1/ the savings bank system ( Cajas) is not a bad one, but in most Autonomous regions polititians have had too much weight on the boards, except in one; Catalonia, where political presence is limites to 25%, and most Cajas where below this
            2/ To compare Caja Madrid with La Caixa is complete bullshit; La Caixa is sound, and CajaMadrid has married Bancaja ( with governement money by the way) which is the bethrodal of the mute and the deaf, not knowing who is in worse state
            3/ Aznar governement got rid of deficit, true, but surfing the biggest state bubble that ever happened in Spain, which gave incredible revenues at all levels of administration due to intensive construction; the result is obvius, now theres no money, the party is over
            4/ It would be interesting to analize, nobody has done it so far, the role on this catastrophic events that Mr Rodrigo Rato had; after promoting, incentivating finantial pornography ( the real state bubble, and the slashing of taxes to the oligarchs and banks, Ley Rato 1996 ImasD) he flew to the FMI, where misteriously didnt last much; Had anything to do with it Christopher Story’s report in 2008 that hips of funny money where kept in Spain?
            keep smiling falks¡

          2. Diego Méndez


            yes, you are right. CajaMadrid is not La Caixa.

            What I meant is you have some big cajas (La Caixa, Unicaja, the Basque cajas), which are some of the most succesful banks in Europe (NPL around 3%, big capital cushions, etc.) and a lot of many cajas, most of them very small and very politicized, which are the real problem.

            But only La Caixa accounts for one third of total caja assets! Thus, Viator’s stat is not meaningful at all.

            Regarding deficit reduction, yes, it was easier because of the bubble. But the UK and the US (among many others) had big bubbles (including a huge financial bubble) and kept on deficit spending. We made the right choice, they didn’t.

            Anyway, what marvels me the most is the fact that, while Zapatero is rightly blamed for being illiterate on economics, all those supposed economic experts (Rato, Solbes, and a huge cheerleading team of prestigious economists) didn’t see anything coming til’ the very last moment.

            I am still waiting for someone to say: “I am sorry. We were wrong. We could have taken better policy decisions”.

    2. auskalo


      Hugh said and wrote lots of stupid things about the housing mess in Spain. He corrected some of them after some criticism by Charles Butler from Ibex salad.
      The main source for housing in Spain is ricardo verges.
      Your quote of Hugh was copy and paste from Bloomberg, not Hugh’s research.
      And if those MBS made by Kutxa were sold to maturity don’t worry at all.
      In Basque Country the housing bubble was less than half of the Spanish one, half unemployement, good industrial base and it’s government debt is still AAA and much lower.
      Hugh is not a very reliable source, take it with a grain of salt.

  9. PDC

    Though I second most of Soros’ analysis, I disagree with the conclusion that: “By insisting on pro-cyclical policies, Germany is endangering the European Union”.
    I know this is a very popular thesis; still, I don’t buy it.

    Europe is a “herd of cats” with interconnected but at the same time different languages, cultures and economies. Every nation looks at the others with a peculiar mixture of competition, despise, envy, sense of superiority, inferiority complex… When a sense of security prevails, their paths can diverge. When, as now, everybody feels endangered, they look at the example of the stronger of the pack, and follow.

    Now, no one, not even the Germans, feels comfortable with the markets: the risk of a new and broader “confidence crisis” on sovereign debt is such a nightmare that it simply cannot be allowed. So, austerity will be.

    “But this will increase the ratio debt vs. GDP”

    Yes, but it is a policy that can be understood by the whole pack. The Europeans will BELIEVE so they will somewhat coordinate themselves and accept sacrifice.

    “There will be unrest, protests, revolts”

    Not seriously: I think there is some risk connected with France (tradition…) so they will have to be very cautious in implementing austerity.

    “Other strategies would be better”

    Theoretically, maybe. It doesn’t matter because Europeans wouldn’t be able to coherently follow them.

  10. RebelEconomist

    There is so much nonsense written on this topic in particular, and on monetary policy in general. Look, it’s simple – fix the value of money in real terms and live with it. It may be true that such a hard currency rules out various ways of denying or delaying problems, but this constraint need not be a problem if people face up to economic reality. Errors at the sub or super national level can be handled by transfers if sympathy exists and by bankruptcy if not.

    The economic success of Germany in the 1960s and 70s owed much to the Deutschmark solidity that drove German industry to find real solutions to their competitiveness problems instead of the inflation and devaluation tried by countries like Britain, and the nature of the euro was conceived out of the desire of the rest of Europe to enanate that success. It would be tragedy if the eurozone squandered the asset that a hard and credible euro represents in a search for an easy way out of its first big test.

    1. Diego Méndez


      but Germany never was in a debt-deflation trap, with over 20% unemployment and no access to international financing.

      No one is talking about absolutely throwing away the euro’s credibility. But we can’t have all the European periphery imploding with 20% GDP decreases, as Ireland already has had.

      In the medium and long term, you are right: the only solution is reforms and higher productivity. But in the short term, the periphery needs some relief. This crisis goes beyond anything seen in Western Europe in the last 80 years.

      Let half of Europe implode, and the breach in confidence may never be repaired. The European Union would have failed.

      1. RebelEconomist

        That is where the bankruptcy / restructuring mechanism comes in, Diego. Mistakes should be borne in the first place by those responsible – the borrowers and their lenders. I am not against the use of public money or Keynesian stimulus, but save that to deal with any collateral damage. It is crazy to bail out European banks indirectly by bailing out the countries and developers they lent to.

        1. Diego Méndez

          Developers and banks? In the case of Spain, we’re talking about some hundred thousand viable businesses that are facing huge difficulties because of disappearing sales and no access to credit.

          This is not about developers (most of them will go belly up, with or without stimulus) or stressed banks, not even housing-related manufacturing companies (most of them will go belly up, anyway).

          We’re talking about productive companies, innovative companies in design, software, internet-based models, new business models in traditional sectors, etc.

          It will be an irreversible loss.

          1. RebelEconomist

            That is when the use of public money should come in – after the failed businesses have been bankrupted. Provide state support to help their entrepeneurs and employees switch to other activities, and to encourage the development of replacement businesses by people with new ideas and energy. In short, use your fiscal ammunition to facilitate change not to prevent it. Hopefully the Germans would be happier to contribute to transfers for such purposes. I am afraid that the crass liquidation of the 1930s has given creative destruction a bad name.

          2. Diego Méndez

            Encourage entrepreneurs to swith to what?

            Those companies are the future! Machine building, new materials, green energy, software, internet, etc. They are viable businesses unless credit is cut and GDP falls catastrophically… but that’s exactly the problems we are facing if no stimulus is made.

            No single industry fares well in a catastrophic environment. Of course, right now, some manufacturing industries are faring well, because of a one-off inventory effect.

            That’s why Germany seems to be growing. That’s why Spanish car factories are hiring. But the inventory effect will subside in a matter of months, and we’ll get right next door to hell, again.

            Unless we do something to prevent it!

          3. RebelEconomist

            Maybe the state could promote identified industries like the ones you mention via subsidies for capital investment or by improving education in key subjects like science, but I was also thinking of measures to assist economic turnover in general, such as grants to redevelop property for changed use or assistance with relocation and retraining.

          4. Diego Méndez

            No one can tell which company belongs to the future and which does not.

            Even in home-related industries, a bust sofa manufacturer may happen to have some talented people, create innovative designs, promote them through propietary software, start exporting like crazy and become the next Spanish success story.

            In the 1970s, the Spanish textile industry was dying. Some people, like you, proposed letting textiles just die. Only two decades afterwards, a small Spanish company called Inditex (Zara) had conquered the world (and their owners were investing in innovative start-ups in their home region).

            You just cannot know where the next success story will come from. But you must know where it won’t come from: a country suffering 20% falls in nominal GDP.

          5. RebelEconomist

            I agree that it is hard to pick winners accurately, but it seems reasonable that fiscal action to increase the supply of people with widely applicable skills – eg maths – is a relatively good way to spend public money. Similarly, improving the environment for business start-ups by subsidising retail refits might encourage the generation of more zaras. But we are getting away from the point I was trying to make, which is that there are better ways of dealing with the problems of the peripheral eurozone countries than debasing the euro or persuading the Germans to spend recklessly. By the way, if Spain could contract its nominal GDP by 20% at a stroke, I dare say its economy would then boom – providing the fall in nominal GDP could be achieved without reducing real GDP. In other words, increasing Spain’s competitiveness enough would solve its economic problems.

  11. Don Benson

    I really appreciate Yves bringing this article to our attention. Unfortunately, in order to understand what Soros is really saying, one must read the FULL ARTICLE in the N.Y. Review of Books [not the NY Times].

    My feeling is that most of the comments so far reflect just a response to Yves’s digest of the article, and so miss understanding and appreciating what Soros really said.

    1. Jim Haygood

      Right — Soros’s NYRB article is one of the more comprehensive treatments of the subject. His postscript is even grimmer than the earlier portion of the text quoted by Yves:

      ‘Germany went into the G-20 meeting in Toronto on June 26–27 largely isolated. Before the meeting, President Obama publicly pleaded with Angela Merkel to change her policies. At the meeting the tables were turned. Canada’s Stephen Harper as the host and David Cameron, the newly elected Conservative prime minister of the UK, lined up behind Merkel, leaving Obama isolated. Supporting Merkel’s approach, the G-20 endorsed a halving of budget deficits by 2013 as the target. This has extended the threat of a deflationary spiral to the global economy, making the experience of the 1930s even more relevant than it was when I gave much of the preceding text as a speech at Humboldt University.

      ‘The political leaders claim to take their cue from the financial markets but they are misreading the signals. Sovereign risk premiums have widened in Europe because of the situation of the banks; but yields on the government bonds of the US, Japan, and Germany are at or near all-time lows, yield curves are flattening, and commodity prices are declining — all foreshadowing deflation.’

  12. Jim Haygood

    Soros’s second recommendation — that monetary policy must become more expansive to counter fiscal austerity — is the critical one. With fiscal policy stuck on ‘austere,’ only monetary policy has the flexibility to change in the short run. And it will, but not in coordinated fashion.

    A couple of days ago in the WaPo, the Federal Reserve floated a trial balloon about the possibility of a large ‘QE II’ if deflation should emerge. Bernanke, a student of the 1930s, fears deflation. There’s no doubt that he’ll fire up the dollar-drop helicopter fleet if the outlines of a disinflationary double dip begin to emerge.

    But the ECB, sticking to its sterilization objective, is unlikely to pursue quantitative easing until the social chaos foreseen by Soros emerges — and maybe not even then. It’s really a kind of grim horse race between a Sorosian ‘change of heart’ at the ECB, a Greek devaluation/default, or a German decision to leave the euro.

    The absence of a common European treasury, pointed out by Soros, probably dooms the euro. Democratic political systems feature perverse incentives which ensure that the Maastricht criteria for fiscal rectitude will be violated repeatedly. Yet no European country wants to cede taxation and fiscal sovereignty to a European treasury, funded by an enlarged Europe-wide tax which (like the US federal income tax) would loom much larger than the budgets of individual states.

    Greece, which CANNOT grow its way out of its debt-deflation trap, is the lit fuse which will blow up the euro in due course, if the radical but necessary measure of restructuring Greece’s debt is not taken now instead of later.

  13. Marc fleury

    Wouldn’t a monetary solution, eg QE to buy govt debt or cdo, create a much needed liquidity AS WELL as make ger more competitive. Clearly fiscal solutions create a conflict but MMT ones don’t. Therefore the last statement seems wrong to me. A MMT solution is exactly what will change germAns opinion. thoughts?

  14. Claude

    Much of this discussion is overblown. Obviously the imbalances in The EU and especially the Eurozone are real and will have to be addressed down the road. But are they really bigger than the imbalances in Chimerica? Its the pot calling the kettle black.
    The dirty little secret is, no other capital markets are large to accomodate sustained speculation against the US AND Europe at the same time. Are US-treasuries being bought because the economic outlook in the US is all that great, or because the US has successfully resolved all of its problems and adjusted the imbalances vis a vis Choina? Funds are flowing in that direction, because there really is no other place to go.
    The key question therefore is: Is it more likely, that the Europeans are going to come to some form of adjustment, sharing the pain, or is it more likely that the US and China will.
    The rescue measures will not solve the problems within the EU, this however is besides the point.
    Given the imbalances everywhere, the only thing that needs to be achieved, is for the problems within the Eurozone to pale in comparison to the imbalances in Chimerica.
    The recue package only has to keep the wheels turning, until the pendulum of market attention swings elswhere and different imbalances become the focal point of attention.

  15. i on the ball patriot

    Soros Stirs The Colors

    Its a shotgun marriage,
    Where no one enforces the vows,
    Its a sure fire plan for divisiveness,
    That only a psychopath would espouse,

    Drop twenty seven colors,
    Into one gigantic can,
    Stir them all with gross corruption,
    Its a smartly devious plan,

    Founding fathers are now ‘architects’,
    George Soros says with aplomb,
    As he sets the stage for delivery,
    Of the ‘Too Big To Fail Bomb’,

    But before you buy his book,
    Consider the devious plans,
    The ‘architect’ with the shotgun,
    Owns the colors in the cans,

    The ‘architect’ is the rich man,
    George Soros is one too,
    They serve up divide and conquer,
    Its their most controlling brew,

    Your target is corruption,
    Your weapon is democracy,
    Take the shotgun from the rich man,
    If you want to be free …

    No balls! No brains! No Freedom!

    Deception is the strongest political force on the planet.

  16. Friedman's Ghost

    For me, watching the EU is a little like what it must have been like to watch a young United States in the 1790s. I believe some of this process is Europe wrestling with more unification and centralization verses national/cultural sovereignty. These things are not easy to build and in the US example, a bloody Civil War was fought, not only over the issue of slavery but the relationship of the states and the national government. In no way am I saying Europe’s path will be similar but it is a process none the less.

    I am leery of Mr. Soros because of his history yet he does make some reasoned points.

    Finally, kudos to Yves for her use of the word “hair shirt”. It’s always been a favorite of mine (as well as a favorite R.E.M. song).

    1. Andrew P

      Yes, the EU is sort of like a less democratic version of the Articles of Confederation with a central bank bolted on. The ECB could be enough to prevent the whole thing from blowing up, but only if they are lucky, or if Trichet is willing to imitate Helicopter Ben. The real test would be how the ECB performs during a serious electronic bank run – like the post-Lehman run on the US money market funds. They may get lucky and not have to face this, but if they do, will they pass the test?

  17. Hugh

    This is another example of expert validation. Soros isn’t saying things here that haven’t been discussed on this blog for an age. Soros is a pirate, a very successful one. He made his money in currencies so when he speaks on them he carries a certain weight. But making billions doesn’t make even a Soros a good macroeconomist. He talks about the euro causing a bubble but let’s face it there were bubbles all over the place, including non-euro countries like Eastern Europe, the US, and the UK. Nor is it surprising that those economies with the hottest and/or diciest economies should feel the burn first when the bubbles burst. And remember that the bubbles burst before the euro did.

    Also while Soros notes this is a banking crisis, he really fails to key in on the exposure of Northern European banks, including German ones, to Southern European debt. So Germany’s decision to follow a deflationary course not only cuts the throat of its exporters but also that of its own banks. I am also unsure if Germany would escape, as he says, the worst consequences of its actions, that is that others would suffer even more. In the Great Depression, it was the US as a creditor nation that got slammed harder. Is there some reason to think if things go south, that Germany as a creditor would not be similarly hammered?

    At the end of the article, in a postscript, Soros says that European leaders are misreading the signals. He assumes that they can read them correctly. This is an especially strange sentiment coming from him. Soros made his billions betting on their stupidity. Now he would place his hope in their good sense. Talk about irony.

    1. Perfect Stranger

      Nassimm Taleb in its first book ridicule him and his “philosophy”.

      Pirat!? I would say: sociopath.

  18. Gerald Muller

    I am surprised that, in all this interesting discussion no one has mentioned the -very- poor level of leadership in Europe. There would be far less problems if Baroso would be a real natural leader -like Delors was in his days- and if the system had been simplified. Right now, there are three Presidents of Europe: Yves Leterme, ex-prime minister of Belgium the actual nation in charge of Europe for 6 months (how can it manage Europe when it cannot manage its own small country), Manuel Baroso, chairman of the commission, chosen by the big countries after some horse trading and Hermann von Rompuy, President of the council for 30 months (not mentioning poor Ashton). Having just said that throws some light on the difficulty of management of the EU. The above economic discussion may be very interesting and to the point, but, IMHO, if there is no real undisputed leaser that emerges, nothing will be achieved in the present mess.

  19. Frank Ohsen

    Never forget Soros does what’s best for Soros.

    If he states anything publicly be rest assured just like Goldman Sachs he most likely won’t lose even if you don’t swallow it hook, line, and sinker. But he sure as hell will give it the good old college try. Afterall, since he didn’t pay anyone to give his ‘advice’ on what Germany should do what does he have to lose?

    Nothing like being able to sway markets for nothing. Heed accordingly.

  20. Joseph

    Diego Mendez
    yes you are right
    a little story for you
    in june 2007 appeared a release in Les Echos in France, a journalist called Paolo Rossi Barnard( italo/french) warned about the massive and coordinate sales of gold from several Central Banks ( at 300 usd oz or less) As a result of this, he was sacked, and never ever has he been able to publish in the mass media
    I wrote to Mafo, asking for an explanation; No answer
    Yes, they owe us apologies, Rato, Solbes and Mafo, they all knew it, and did nothing about it, they lied and cheated a whole country; In the same way, in other countries, happened other several events as lethal to we the people as this one
    Keep smiling, even if the effort exhaustes you

  21. doc holiday

    I heart George~

    Re: The biggest deficiency in the euro, the absence of a common fiscal policy, is well known. But there is another defect that has received less recognition: a false belief in the stability of financial markets..

    Great stuff!

  22. sean

    The euro is not backed by a Federal taxation system.
    Funds are raised through intergovernment transfers .
    It has no direct connection with the individual citizens of europe.

    In reality fiscal transfers can only occur if Germans have the same affinity with the euro as Greeks do through a federal taxation system.But they dont.
    This is the central difference between ChiMerica and Germany/rest of EU.
    The US can default its obligations to china by monetising the debt.In the end china wont purchase Treasuries which will force the US to compete by re creating its manufacturing base.
    However a default in Europe by a peripheral country will destroy the balance sheets of banks in France and Germany.There will be many negative feedback loops which cant be controlled as there is no central Federal system.

    The euro zone is nt even a unified monetary system.The variance in sovereign bond prices and yields indicate it is a currency board.
    The Austerity policy means the end of the welfare state in Europe.Welfare has been the social contract that has glued the internal populations of European states together to avoid another rise in facism.

    1. Diego Méndez


      “The US can default its obligations to china by monetising the debt.”

      Yes, but in ordinary circumstances (outside a liquidity trap), that would lead to hyperinflation. Don’t you think confidence on the US dollar would collapse, as would the dollar itself?

      Yes, that’s supposed to be good in a liquidity trap. But will the US stay in a liquidity trap forever? Then growth is as easy as printing tons money, since it will never have consequences… well, til the moment massive money-printing liquidates the liquidity trap.

      Then, doom follows.

      “The Austerity policy means the end of the welfare state in Europe.”

      Can you explain that to me? Welfare state is a social choice: high fiscal transfers from the rich to the poor, creating a broad middle class.

      If you need to be austere, you can: 1) end all privileges for the rich (e.g. subsidies to favoured companies, think banks in the US distributing bailout money to their CEOs), basically eliminating “socialism for the rich”; 2) cut inefficient subsidies to the poor, while maintaining the basic principles for the welfare state; 3) hike taxes; 4) eliminate the welfare state.

      Why do you think Europeans would take option nr. 4 instead of a combination of options nr. 1, 2 and 3?

    2. Andrew P

      Actually, the ECB might be able to stabilize a crisis without a Federal Treasury, but it will depend on quick action and public confidence. Imagine that a large electronic run starts on French banks (which are the most exposed to the PIGS). Trillions of euros are being withdrawn by depositors every hour. The French government guarantees all deposits regardless of size. If the ECB monetizes long term French gov’t bonds to back up that guarantee, then the run should stop. Otherwise, the run continues and France defaults. If the latter happens, the whole EU descends into complete panic.

      If the ECB allows such a panic to occur, where does the money go? It has to go to other banks, as trillions simply cannot be withdrawn in cash. Presumably, Euro deposits can only be made in Eurozone banks, so if there was a panic, the money would flow to Germany. People would also try to convert their money into foreign currency for deposit elsewhere, but they would have to move fast. Mass movement out of the Euro would cause it to drop like a rock on foreign exchanges, and if the EU put on exchange controls, no one would get out.

      The French could also impose capital controls, which would deepen the panic even further, and possibly result in bloodshed…..

  23. Vangel

    Even though Germans may indeed be choose to wear the deflation hairshirt, they seem unwilling or unable to recognize that other Eurozone member states will take even more pain, and their populations may rebel rather than accede. Not only is this deflationary liebestod dubious from an economic economic perspective, but it is risky political business as well.

    I am with the Germans on this one. It makes no sense for them to subsidize Greece so that Greek citizens can retire at 58 and live beyond their means. It is far better to force everyone to be responsible for their own actions and accept the fact that the ill conceived political experiment is a failure.

  24. MichaelC

    Soros, probably more than anyone, has the proven clearheaded rutlessness and gravitas to be able to point out to one and all that, despite all the passionate arguments on all sides, the Euro is and always was a fragile and vulnerable political experiment.

    Unless its flaws are explicitly acknowledged and redressed, it will fail. Full stop. The Eorpean leadership undertstands this full well. The only questions are , Will it fail as spectacularly as the pound?, will it fail in steps, or will its failure be avoided by creating a Euro Treasury?

    Arguments that avoid contemplation of a Euro Treasury are just noisy whistling past the graveyard.

    IIRC Europeans rejected the idea when it was put to a vote. the referendums failed repeatedly. So I expect a resolution to emerge from agreements among the leadership, despite their current posturing to appease voters.

  25. miep

    Disgusting blame the victim attitude by the frauster nation inhabitants. A mix of Xenophoby and denialism has sure replaced rational thaught on Germany in angloamerican circles. Soros is behaves particular evil here. Most people that sell the idears that profit them dont think they can do much damage. But Soros, hes a strong believer in extreme feedback loops, he wants to help to a particular ugly one just to earn a couple of billions.

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