We need your help now
Support from readers like you keeps The Journal open.
You are visiting us because we have something you value. Independent, unbiased news that tells the truth. Advertising revenue goes some way to support our mission, but this year it has not been enough.
If you've seen value in our reporting, please contribute what you can, so we can continue to produce accurate and meaningful journalism. For everyone who needs it.
Sign in. It’s quick, free and it’s up to you.
An account is an optional way to support the work we do. Find out more.
By continuing, you are indicating that you accept our Terms of Service and Privacy Policy.
BILLIONAIRE GEORGE SOROS delivered a speech in Trento, Italy yesterday on the Eurozone crisis and it’s an absolute dynamo.
You really ought to read the whole speech, which is on his personal webpage, as it starts off with an overview of his economic theories (which revolve around the idea that markets are deeply imperfect and prone to turn into bubbles based on human fallibility and lack of knowledge) and then nicely explains how all of this explains the current crisis in Europe.
What’s fantastic is that he really gets it from all angles.
This is a really killer characterisation of the Eurozone:
I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognised that perfection is unattainable; so they set limited objectives and firm timelines and then mobilised the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.
Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realised that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it. When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement. At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.
And then came the moment that German, formerly at the forefront of a federated Europe, stopped the progress dead in its tracks…
The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realise the implication of that declaration, showing that they are not perfect.
This is a really huge point to grasp, because a nagging question has been: Why did the market think of Greece, Ireland, Portugal, Spain, etc, as being risk-free sovereigns at one point, and then decide that they were not risk free and subject to credit risk?
Soros’ answer: because they were essentially risk-free so long as the arc was always towards more integration. That ended when Merkel made the declaration he says above. This is key.
Despite the fact that the Euro crisis has been happening for at least three years now, there are still many who can’t articulate the roots of it as well as Soros does in these two paragraphs:
The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realise what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.
His key warning:
In my judgment the authorities have a three months’ window during which they could still correct their mistakes and reverse the current trends. By the authorities I mean mainly the German government and the Bundesbank because in a crisis the creditors are in the driver’s seat and nothing can be done without German support.
He ends with a plea:
We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.
To embed this post, copy the code below on your site
I’m pretty impressed with that analysis. One phrase caught my eye like a streaking comet:
”Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control.”
There’s not much stated as to how he thinks things might actually be fixed but the above extract implies he wouldn’t approve of the Fiscal Compact & ESM Treaties very much as they even further reduce the control of the currency by indebted nations such as ours and thereby dragging us further into the position of a Third World country.
I now await that 90% of top irish economists to say how wrong Soros is.
No doubt Mr Clowery will join the debate shortly with a full list of who said what and when and why they are right and world leaders in the field are wrong.
Gary has retired, the treaty has been voted in!
21 summits to date over last 3 years and the Euro Zone banks are still considered to be barely solvent at best. Spain and Italy have declined sharply and Greece is still a basket case. The rot in the “core” countries such as Germany, France and Belgium while not as blatant is also starting to become more evident.
Soros might thing the Euro has a window of 3 months, but if it was 30 years, the ECB/EU would not formulate a comprehensive plan.
Join the euro they said.
It’ll be fun they said.
Soros has come to realise the shortcomings of applying empirical methodology to a social science such as economics. A fallacy recognised by Austrian school economists early in the last century and his former business partner, Jim Rogers, decades ago.
One of the Austrian schools most influential economists, Ludwig von Mises, forewarned the Wall St. crash/Great depression. His warning is as relevant today.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
— Ludwig von Mises
Merkel, Obama and, our own intellectual giants, Kenny/Noonan have fallen into Politicans trap. Be seen to be doing something productive even if it’s futile.
Von Mises, if he were alive today, would be pointing to Iceland as the only forward and Japan as an example of the futility of political arrogance.
Shortcomings in economics education.
http://mobile.businessweek.com/articles/2012-06-01/are-economics-phds-learning-the-wrong-thing
Excellent quotes and a wise observation. Politicians don’t get elected on the basis of highlighting past failings.
Very interesting evaluation.
I’m delighted that for once trolls have stayed away from this particular comment box. Great comments here from other readers.
I agree. It seems the trolls havent the intelligence to comment on an article like this.
True.no sign yet of David Higgins .Doris has not made too many mistakes in his financial life so far.our investor politicians aren’t fit to lace his shoes.will they listen to him? No chance
The crunch seems to lie in the observation that Countries became indebted to a currency they did not control.
Rory
I’ll have to wait until Tues and listen to Vincent and Constantine to see if his analysis is correct.
Ask yourself the question “which one of the three Vincent, Constantine or George is the multibillionaire” I think it’s pretty obvious which one knows what he’s talking about.
Its pretty clear which one is the greediest!
From Wikipedia: “Between 1979 and 2011, Soros gave away over $8 billion to human rights, public health, and education causes”.
The FG crew must stay away from the journal on a sunday.
FG and Labour at present (and for some time) have been staying away from anything that makes sense.
@ Dermot. Decades of the rosary for all the lies told during the treaty campaign.
It’s only now that we face this crisis that all the flaws in the EU have been clearly revealed to be potentially fatal unless corrected in the very near future. It was built on” a wing and a prayer”. The EU have been winging it for long enough, but it might be past the prayer stage .
As we can already see, the EU bureaucrats are using this crisis to cede more sovereignty away from national governments and force a political union on the peoplea of Europe without even consulting them.
Will some in government please create a plan b for the exit of the euro, just in case the ‘inevitable’ happens it would be nice to know that there is a exit strategy, we could call it a safety strategy.
Great article, makes a lot of sense. The question is, will we accept more political integration if it means solving the crisis. Personally I would, overall, considering we have had decades of peace in Europe. We are in trouble now, people are suffering, but put into perspective, we are in a much better place than 70, 100, 200 years ago. I just hope it lasts, there is an increasing growth in extreme positions, which are apparent on this forum. People are becoming very quick to use terms like ‘traitor’ without realizing what comes with language like that. Nothing is black or white, especially Europe.
And that is one of the real dangers. People will sign up for a lot of things when they are struggling to put food on the table. It is funny how Europe being more unified could end up causing greater trouble down the line. A federal Europe looks inevitable. One central bank and Eurobonds will require something similar to the federal union in the US. However they have one language and generally one culture. You would see a huge increase in support for far right Nationalist parties in countries right across Europe. The politicians would love this as it would mean more power and money. However if our corporate tax rate is taken out of our hands we will end up relying on subsidies just like our farmers have being doing for the last 30 years.
I don’t know that there is choice, I think the EU experiment is past the point of no return. It appears the objective is a unites status of Europe modelled after the USA in which there is a federal treasury. Soros is right – he is stating the situation without the politics. It has long been said that the situation is fixable of the political will is there. Hopefully with the change in French Presidency Germany is more isolated and will force the political will
I dunno.. The EU is fast becoming less and less democratic and far more nannying..
It’s hard enough getting your voice heard in Ireland. Can you imagine trying to be heard in Europe?
It’s pretty apparent that the United States of America isn’t a shining beacon of what we would hope to become.. It has some great strengths but also tremendous flaws. And one of those flaws is the amount of distance between the people and the leaders.
That distance just keeps growing. To surrender more power to Europe is like agreeing to only have part of a say in anything.. And inevitably there will always be one larger state or bloc of states that look after themselves first. That’s simple human nature, seeing as we are pretty small we are in danger of being totally overwhelmed..
Fianna Fail shifted bank liabilities onto the state and Fine Gael / Labour have retained policies running a massive budget deficit. Until private and public sector pay are payable out of current revenue and are inline with European average, and until we own up to the fact that bank debt can never be repaid, the cliff we will be going over keeps getting higher.
Agree 100% John. thumbs up from me
What would a political union actually involve that we don’t have already? A European constitution? Abandonment of the Irish constitution? Common foriegn policy?
If the EU regulated all EU banks and took responsibility for any future failings that could be the type of political union necessary to maintain stability but not overtly decimate member states sovereignty. Ultimately the two key issues are whether there is a sufficient political will from the powers that be to solve the crisis and even if so are structural imbalances too great in the Eurozone to allow for a common currency that genuinely benefits all.
Hmm… he doesn’t paint a good picture of what it might be like if the euro survives. A German empire with Germany at it’s hub and the hinterland permanently financially depressed… It doesn’t seem to matter about fiscal treaties etc, radical change seems inevitable for Europe, and it may not be all that good…
“We don’t need a European super state, which the European Union is seeking to establish … but rather a Europe and world consisting of hundreds or even thousands of tiny Liechtensteins and Singapores.”
Hans-Hermann Hoppe
Incredibly misleading headline, Soros did not say the phrase in the headline at all.
The Journal is paraphrasing.
Within certain limits (feel free to disagree) if Germany has been lead by Merkel for so long and during that period the changes and conditions that should have been done – but weren’t, were not – then as Merkel as head of the ship for that period, is responsible.
…After all the buck (or the euro) stops with her for that period he refers to?
That’s exactly the question Donncha. Does our future now lie in greater political as well as economic integration? I suggest it now must as we (Europe) can’t realistically wind the clock back 40 yrs, or if we do we risk political and economic instability. And I for one fear an unstable Europe; we have ample examples of what horrors lie down that road.
What does Soros have to gain?
have your say