Friday, September 14, 2012

The Eurozone: George Soros is dead wrong

Lead or leave.

Currency speculator George Soros laid down the law for Germany: change or get out of the way:

He warned that the split between creditor and debtor countries in the euro risked becoming permanent, with debtor nations condemned to low growth because they are forced to pay a high premium for access to credit. European union was liable to fall apart under the pressure, he added.
George Soros

Soros singled out Germany as the country that should take responsibility for this "class divide" in the eurozone.

"In my judgment, the best course of action is to persuade Germany to choose between becoming a more benevolent leading nation, or leaving the euro. In other words, Germany must lead or leave."

Soros called on Germany to show leadership by establishing a "more or less level playing field" between debtor and creditor countries, and aiming for eurozone growth of up to 5%, "allowing Europe to grow its way out of excessive indebtedness". But, he said, "this would entail a greater degree of inflation than the Bundesbank is likely to approve".

Alternatively, he said, with Germany out of the euro, the currency would depreciate, cutting national debts in real terms and allowing debtor countries to regain competitiveness.
He forecast good times for the ROE  (Rest of the Eurozone) if Germany took its stronger currency and quit the Eurozone:

His prediction is that these currently sickly countries would do perfectly well.

“If Germany left, the common market could hold together and actually it would be a remarkable relief,” Mr. Soros told me. “The euro would fall in value, so the debt which is denominated in euro would also fall in value and the competitiveness of the debtor countries compared to Germany and the other creditor countries would greatly improve.”

In this scenario, the Club Med countries would benefit partly from the inflation and currency devaluation that their existing monetary marriage to Germany precludes. Their renaissance would also be based on their economic fundamentals, which Mr. Soros argues are strong but are being discounted by the markets because of the existing fiscal and monetary straitjacket.

“It’s remarkable, remarkable, when you look at the Latin euro – the euro excluding Germany – it actually compares very favourably, not only with Britain, but with the United States and Japan,” Mr. Soros said.

“A Latin euro, where the members formed a fiscal union and would therefore go to introducing euro bonds, would be able to borrow at rates comparable to Japan, the United States and the United Kingdom. They would rank equally on the macroeconomic basis, if you compare them in terms of total indebtedness and deficit.”

Mr. Soros argues that Europe couldn’t survive the exit of one of its weaker, southern members but that it could weather the “amicable” departure of Germany.

“If Italy or Spain left, not only the euro but also the common market and the European Union would fall apart,” he told me. “Whereas if Germany left, the common market could hold together.”

The Cat thinks that Soros should stick to his knitting, and leave such suggestions to others.

The idea of a viable Eurozone without Germany is unthinkable. 

With Germany remaining as a member of the European Union but outside the Eurozone (like Britain is) the whole magnificent European Union concept would be seriously imperilled.

The common Euro currency is a step along the way of the 27 nations towards a United States of Europe (USE). Such a USE needs close coordination of the national financial and fiscal policies just as it needs close coordination of the foreign policy, defence, common market and other spaces.

To have the biggest economy in the EU step outside the common currency would be the first step in the eventual dissolution of one of the most hopeful and progressive developments since nations fought viciously – with tens of millions killed – during two world wars.

That price is too high for all of Europe, and too high for the rest of the world.

So the Soros simplification of the issues as Germany can leave the Eurozone and everything will be A-OK for the “Latin euro” (his words) is just that: a trite simplification.

Soros is active in the markets; the markets like stability even at any cost.

But the turmoil now taking place in the EU and Eurozone is fundamentally the manifestation of growing pains. The members are learning the limits of what each can do individually; they are learning that becoming the United States of Europe takes a lot of mutual exploration, understanding, discussion, interest-based negotiation and patience.

Quick and dirty solutions seldom work when experiments of the size and complexity of the EU are being conducted.

Step aside, Soros: Leave Europe to the Europeans to sort out.

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