George Soros: Eurozone Crisis Has Entered “A Less Volatile but Potentially More Lethal Phase”

Matt Stoller is a fellow at the Roosevelt Institute.  You can follow him on twitter at

As the next INET conference begins in Germany, one topic of conversation is sure to be George Soros’s piece discussing the Eurozone crisis.  He points out that the Eurozone has been quietly restructuring its financial arrangements along national lines, ending an era of co-mingled assets and liabilities across national borders.  This is something I hadn’t realized, but it presents, as he shows, other dangers.

At the onset of the crisis, the eurozone’s breakup was inconceivable: the assets and liabilities denominated in the common currency were so intermingled that a breakup would cause an uncontrollable meltdown. But, as the crisis has progressed, the eurozone financial system has been progressively reoriented along national lines.

This trend has gathered momentum in recent months. The LTRO enabled Spanish and Italian banks to engage in very profitable and low-risk arbitrage in their own countries’ bonds. And the preferential treatment received by the ECB on its Greek bonds will discourage other investors from holding sovereign debt. If this continues for a few more years, a eurozone breakup would become possible without a meltdown – the omelet could be unscrambled – but it would leave the creditor countries’ central banks holding large, difficult-to-enforce claims against the debtor countries’ central banks.

The big problem, Soros says, is Germany.  The Bundesbank doesn’t want to be left with credit losses or the remote possibility of inflation, so it is seeking to reduce aggregate demand in Germany.

The Bundesbank has become aware of the danger. It is now engaged in a campaign against the indefinite expansion of the money supply, and it has started taking measures to limit the losses that it would sustain in case of a breakup. This is creating a self-fulfilling prophecy: once the Bundesbank starts guarding against a breakup, everybody will have to do the same. Markets are beginning to reflect this.

The Bundesbank is also tightening credit at home. This would be the right policy if Germany was a freestanding country, but the eurozone’s heavily indebted member countries badly need stronger demand from Germany to avoid recession. Without it, the eurozone’s “fiscal compact,” agreed last December, cannot possibly work. The heavily indebted countries will either fail to implement the necessary measures, or, if they do, they will fail to meet their targets, as collapsing growth drives down budget revenues. Either way, debt ratios will rise, and the competitiveness gap with Germany will widen.

Soros offers a complex plan which would start with fiscal probity, at least nominally.  He proposes auctioning off the ECB’s “seignorage rights”, ie. the profit that the ECB makes by creating Euros.  This large pot of money would be used to incentive member states to bring down debt.  Soros also distinguishes between debt that will lead to investment returns versus debt that will not.  He proposes making the latter the basis for fiscal tightness.

By rewarding good behavior, the fiscal compact would no longer constitute a deflationary debt trap, and the outlook would radically improve. In addition, to narrow the competitiveness gap, all members should be able to refinance their existing debt at the same interest rate. But that would require greater fiscal integration, so it would have to be phased in gradually.

The Bundesbank will never accept these proposals, but the European authorities ought to take them seriously. The future of Europe is a political issue, and thus is beyond the Bundesbank’s competence to decide.

This sounds like a clever way to allow the European elites to pretend like they are engaged in austerity and avoiding money printing, as the European elites engage in fiscal expansion and money printing.  the holdup is Germany.  As with the ECB printing huge sums of money to buy Eurozone debt through its LTRO program while masking those purchases, it’s about ultimately doing the stability enhancing political embarrassing step while not wounding anyone’s pride.

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About Matt Stoller

From 2011-2012, Matt was a fellow at the Roosevelt Institute. He contributed to Politico, Alternet, Salon, The Nation and Reuters, focusing on the intersection of foreclosures, the financial system, and political corruption. In 2012, he starred in “Brand X with Russell Brand” on the FX network, and was a writer and consultant for the show. He has also produced for MSNBC’s The Dylan Ratigan Show. From 2009-2010, he worked as Senior Policy Advisor for Congressman Alan Grayson. You can follow him on Twitter at @matthewstoller.


  1. Susan the other

    Sorry, can’t follow. Will someone please translate: What does Soros mean by his recommendation to auction off the ECB’s seignorage rights? Why is this such a large pot of money in the first place? Isn’t this financialization an appropriation of sovereign authority to guide their own productive economic growth? Soros is usually a benign figure but I do always get the feeling he’s the great spirit of financialization. And the Bundesbank can see a slowdown in exports coming. They probably think they have to tighten now or fail later.

    1. F. Beard

      What does Soros mean by his recommendation to auction off the ECB’s seignorage rights? Susan the other

      The privatization of the Euro? Making the ECB a private central bank? So the Euro would eventually be backed only by private debts owed in it since the sale proceeds would be used to extinguish sovereign debts owed in it?

      So whoever buys it gets his money back from sovereign debt repayment? So the Eurozone countries end up debt-free in exchange for privatizing the Euro?

      1. Susan the other

        I’m so sorry, Beard. You have always lost me in your balance sheet bottom line. But I still believe your analysis. What I don’t believe is all the speculation.

        1. F. Beard

          I don’t ask anyone to believe speculation!

          It’s just speculation!

          Money creation involves a lot of tail-chasing; it’s easy to be confused by it.

  2. Very Serious Sam

    “Soros offers a complex plan which would” end with another clever scheme that further increases the burden on Germany’s taxpayers to fund the bills for other nations failures, partys and mistakes.

  3. Hugh

    As Soros notes, the seignorage rights come to about 25 billion euros a year. Does he really think that is even remotely in the ballpark as to what is needed to incentivize the periphery to do much of anything?

    Also if what does it mean that Europe is renationalizing if creditor countries like Germany still end up at the end of this process holding big loans to Periphery central banks.

    Also where is private debt in all this? If French and German banks have big exposures from fueling a housing bubble in Spain, how does this help them?

    Also isn’t in this some kind of supply side redux? Increasing supply through “good” investments that “pay”. But isn’t what is needed increased aggregate demand, and isn’t this accomplished precisely by governments running deficits to increase that demand? As in look at Roosevelt and the Great Depression.

    Also isn’t this more sovereignty stripping since Soros would create a “European” authority (dominated by whom I wonder) that would OK his investments that pay scheme? So instead of the current system of France and Germany calling the shots through their gauleiters in countries, like Greece and Italy, they would do so through this new investment bank entity Soros wants to put together.

    I have said this many times, but Soros made his billions as a financier just as Buffett made his as an investor, but this doesn’t mean that either know a thing about macro. It just means, in a kleptocracy, that both are particularly talented and successful pirates. It does not mean that you would go to them for brain surgery, just as you would not go to Bill Gates for advice about the education system. So why would, or should, anyone listen to them about macroeconomics?

    1. Andrew not the Saint

      “So why would, or should, anyone listen to them about macroeconomics?”

      Exactly, but I’ll add that we’re also listening to the vast majority of economists who failed to see this train wreck of a crisis coming… and then failed again to modify their views even after they saw the abyss.

      MSM is still by and large just propaganda.

    2. Nathanael

      Soros’s profiteering originally came from spotting macroeconomic trends and betting against people (like the UK government) who were fighting the trends.

      He’s actually a pretty smart macroeconomic analyst. Try reading his books. He’s trying to get people to focus on what he calls “reflexivity”, which the rest of us call “positive feedback loops”.

  4. jake chase

    Once again Germany is the scapegoat. Germany remains unwilling to destroy its own economy to permit continued uncontrolled borrowing by neighbors addicted to consumption without production, and more importantly, to banks determined to avoid default on soverign bonds they should never buy in the first place. Soros rightly sees the answer as a private central bank. JP Morgan understood this one hundred years ago, and put his stooges to work pushing it across. That would be Woodrow Wilson who became Morgan’s man in the White House, and Teddy Roosevelt, who came out of retirement to run a third party campaign which split the Republican vote and insured a Wilson victory, making him the only Democratic president other than Grover Cleveland (and maybe Garfield and Arthur?) since 1844 or 1856.

    Why all the fuss about the collapse of the Euro? Because that would return economic soverignty to individual countries rather than bankers and CEOs. If any of these countries had any sense they would run from the Euro and recapture their economic destiny. Then again, perhaps if California had any sense it would secede. These days nobody seems to have any sense, but those making the decisions are still making plenty of money. Funny how that works.

    1. Ignacio

      I would like to know if you apply the same line of reasoning you use to explain trade and capital flows between Germany and the europeriphery to the case of US/China relationships. Just to see if you are congruent.

    2. Nathanael

      Germany is destroying its own economy. An export-based economy doesn’t work when there’s nobody with enough money to buy your products.

  5. snowedin

    Soros’s money quote: “fiscal integration”, the only way for this to work.

    Won’t happen, but nice try. Maybe that is his intent: to imply the obvious.

  6. Eric L. Prentis

    INET is a joke, it should be renamed IRET (Institute of Repackaged Economic Thinking). Having Larry Summers as an keynote INET conference speaker last year?— what a buffoon!

    George Soros funds INET with $50 million dollars, yet INET generated ideas are nonexistent on the important blogs or in the media. Political-economy intellectual leadership remains with Naked Capitalism and Zero Hedge, which are doing it on a shoestring budget.

    Geroge, either demand your money back or replace INET leadership. Please ask Yves Smith and Tyler Durden for possible names.

    1. Eric

      Inasmuch as Steve Keen, Michael Hudson, James Galbraith, Scott Fullwiler, and virtually the entirety of the MMT (Modern Monetary Theory) crowd, are unrepresented at INET, I suppose that George Soros isn’t serious about replacing current economic theory with something that accurately reflects the actual history of economies.

      1. Yves Smith

        Wake up. Steve Keen, Jamie Galbraith, and Michael Hudson are speaking this year. Galbraith has spoken pretty much every year, and Randy Wray has presented in the past (last year certainly, maybe the year prior).

      2. Eric L. Prentis

        The world is arguably in the worst credit crisis ever, and all the $50 million dollar INET institution can do is nibble around the edges, PATHETIC!

        1. Nathanael

          Proof that money isn’t always power. Soros is trying to get people in power to do some approximation of the right thing, but even when he spends $50 million and drags them to his meetings, they don’t.

  7. Truncheon

    What role does the Bundesbank play in a Democratic society? Man it’s just as malevolent as ‘Murican brands.

    “The Machine recognized the threat to itself, it proceeded to turn off power and life support to vital areas in premptive Defense. Force fields were then raised to prevent intervention”

    1. F. Beard

      I remember that book but not the title.

      The premise was that an AI was built in orbit and then provoked by messing with its power supply to see if it would become dangerous?

    2. FromTheCheapSeats

      Twenty years ago the Bundesbank purchased the HAL2000 computer from Stanley Kubrick.

  8. The Dork of Cork

    LTRO is seriously deflationary …. a gross subsidy to dead banks.
    The respective peripheral treasuries should create base Euros , credit them to peoples checking accounts – tax the shit out of car & oil based waste and bring Germany crawling back for some Top Gear subsidies.

    1. Mansoor H. Khan

      The Dork of Cork said:

      “LTRO is seriously deflationary …. a gross subsidy to dead banks.”


      Here is how the bankers play their game:

      “The respective peripheral treasuries should create base Euros , credit them to peoples checking accounts”

      So true:

      Along the same line for U.S.Citizens:

      And yes:

      “tax the shit out of car & oil based waste and bring Germany crawling back for some Top Gear subsidies.”


      mansoor khan

  9. The Dork of Cork


    Print the shit out of currency and relocalise economies.

    If Ireland can print base euros for bond holders it can print base euros for its citizens.

    M1 is now declining in this country after nearly 4 years of M3 declines.
    It looks like the start of terminal hyperdefaltion to me.
    April Y2011 : 99.086 Billion
    Feb Y2012 : 91.147 Billion

    1. Mansoor H. Khan

      The Dork of Cork said:

      “Print the shit out of currency and relocalise economies.”

      The problem with localization is that fossil fuels (specially crude oil) are highly centralized in few places in the world.

      How should these be allocated to the global population?

      Currently the reserve currency printer (USA) gets somewhat of a free ride when exporters accumulate U.S Currency or U.S. Government Debt. This subsidy is likely to end.

      What should replace the dollar?

      Will there be a global fight over global fossil fuel deposits?

      mansoor h. khan

  10. Linus Huber

    Well, I think, Soros’ suggestion is another scheme that tries to avoid the simple requirement to write off debt that is impossible to service and repay within a reasonable period of time. In all these proposals the aspect of the people’s reactions are always neglected. Furthermore, such ideas try to undermine democratic values by denying the population of a country to simply tell banks to go and f… themselves, what should have been done a long time ago.

    I wonder when will common sense start to emerge? Probably never with all these people living a good life by producing one crazy idea after another.

    1. Nathanael

      The problem of people “failing upward” is severe and has been sickening “economic advice” the world over.

  11. The Dork of Cork

    Y1990 : Irish oil use by sector.
    Total Irish oil use (TPES) :4,422 Ktoe
    Private car : 926 KTOE
    Road freight : 334 KTOE
    Int. Avi : 358 KTOE
    Residential (heating mainly ) :389 KTOE
    Commercial (heating again) :641 KTOE
    Industry :696 KTOE

    Y2010 : Irish oil use by sector (this after major declines since 2006/7
    TPES : 7699 KTOE
    Private car : 1,899 KTOE
    Road freight : 733 KTOE
    Int. aviation : 754 KTOE
    Residential :1,288 KTOE
    Commercial : 494 KTOE
    Industry : 731 KTOE

    The European PIigs at least were feed on a oil Fois gras diet these past 20+ years.
    However our main problem is that we don’t have a positive money supply now.
    Which means we don’t get effective good & service substitution (money for trains but no credit for oil)
    Think of all those empty Spanish & Irish trains while we have more then double the number of private cars on the road.
    We did fine in 1990 Ireland with 800,000 cars on the road rather then the 1,800,000 + cars today.
    We just need a positive money supply to fill those trains…….. like in the UK.…/10/union-claims-rail-firms-have-no-idea-how-b

    The Countries CBs should just credit the citizens accounts with 10,000 euros each and also make car transport / oil central heating unaffordable for most via tax policey………… problem solved.

    1. Mansoor H. Khan

      The Dork of Cork said:

      “The Countries CBs should just credit the citizens accounts with 10,000 euros each and also make car transport / oil central heating unaffordable for most via tax policey………… problem solved.”

      Something like what you said above will eventually happen (god willing) or else we (humanity) is likely to end up destroying itself over fight for remaining fossil fuel deposits.

      mansoor h. khan

      1. Jack M.Hoff

        Manssor, you said; “Something like what you said above will eventually happen (god willing) or else we (humanity) is likely to end up destroying itself over fight for remaining fossil fuel deposits.”

        Possibly in Ireland this might work, but I fail to see how it could here in the US. I mean, whats supposed to become of the vast interior of the country? People who reside in urban settings are able to mass transit and pretty much live their lives without an automobile if they so choose. Its an impossibility in rural areas. Besides who the fuck are the govt to be choosing winners and losers all the time? And make no mistake, thats exactly what they constantly do through their convoluted taxation policies. Its high time that crap ended too. You cannot have any of the ideals of freemen if you support that bullshit, period.

        1. skippy

          “Besides who the fuck are the govt to be choosing winners and losers all the time?”… Jack Hoff aka Richard Hertz.

          Skip here… what twisted reality do you issue forth from? The government[s are now a proxy to capital… full stop. Capital chooses the winners and losers… so what is capital?

          Skippy… freemen.. hahahahahha! The laws of the universe negate freedom… small mind.

          1. Mansoor H. Khan

            skippy said:

            “freemen.. hahahahahha! The laws of the universe negate freedom… small mind.”

            I will take this comment a step further:

            1) This life on earth is very much limited in terms of freedom (laws of physics and man-made laws) and is very short. The main goal should be peaceful co-existence (which means giving up some of that remaining freedom not restricted by laws of physics).

            2) Total freedom can be attained in heaven. There is only one rule in heaven. One cannot be god. This is the only rule in heaven.

            mansoor h. khan

        2. Mansoor H. Khan

          Jack M. Hoff said:

          “Besides who the fuck are the govt to be choosing winners and losers all the time?”

          Some kind of allocation mechanism has to be agreed upon internationally (country quotas) and nationally (quotas within a country).

          Our current design of distribution of money cannot do it. So will have to cooperate at global level and then cooperate a the national level to avert total global chaos.

          mansoor h. khan

          1. SqueakyRat

            Haven’t we tried allocation of capital by markets alone? We got the tech bubble and the housing bubble. Did those strike you as cases of rational allocation?

      1. The Dork of Cork

        Massive subruban & rural housing growth generally away from gas mains which therefore requires oil central heating if you don’t like burning turf /peat.

        The core of Europe refused to pay its workers higher wages…… but the oil must flow.
        They gave the peripheral PIigs mindless credit to expend the surplus for a long term negative gain.

        I recomend you Play with this excellent toy.

        Look at how Germany & France & UK had a relatively static oil consumption while Ireland , Iberia , Greece oil consumption went into the stratosphere.
        Also Italian Nat Gas consumption exploded.
        Also the UK is now in a dramatic (North sea) oil import energy vortice.

        PS .look at these Irish energy / rail figures

        Rail energy use / traffic

        Y1990 : 45 KTOE
        Rail passenger traffic (000 km) :1,225,556
        Rail Freight(000 km tonnes) : 558,550 :

        Y2007 : 47 KTOE
        Rail passenger traffic (000 km) : 2,007,065
        Rail Freight (000Km tonnes) : 128,908

        So thats a 2 KTOE rise for a extra 800,000,000 ~ rise in passenger KM
        Although a massive drop by over 400,000,000 in km tonnes of freight in a BOOM.

        Y1990 : private car : 926 KTOE
        road freight : 334 KTOE

        Y2007 :Private car : 2070 KTOE
        road freight : 1,255 KTOE

        Hello Hello …… anybody home ……. think Mcfly THINK.

        Its time we went Back to the Future.

  12. Ignacio

    What I find key here is that it is the first time I hear a relevant investor recognizing that we are following, consciously or not, a roadmap for the euro breakup.

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