At loggerheads with Merkel..
Arguing for eurobonds which Merkel has just ruled out, at least for the moment. She also refuses the markets to dictate policy, but we would say, if you don’t like that, you’d better have a plan..
SPIEGEL Interview with George Soros
‘You Need This Dirty Word, Euro Bonds’
In a SPIEGEL interview, billionaire investor George Soros criticizes Germany’s lack of leadership in the euro zone, arguing that Berlin must dictate to Europe the solution to the currency crisis. He also argues in favor of the creation of euro bonds as a way out of the turbulence.
SPIEGEL: Mr. Soros, we currently see a global banking crisis, a
currency crisis and a sovereign debt crisis. Has the financial dilemma
become too big to handle? How can politicians on both sides of the
Atlantic be expected to solve such a multitude of crises?
Soros: The politicians have not really tried to fix any crisis;
they have so far tried only to buy time. But sometimes time actually
works against you if you refuse to face the relevant issues and explain
to the public what is at stake.
SPIEGEL: Are you talking about the Germans? Many experts think
Chancellor Angela Merkel has been particularly hesitant to address the
Soros: Yes. The future of the euro depends on Germany. This is
the point I really want to drive home. Germany is in the driver’s seat
because it is the largest country in Europe with the best credit rating
and a chronic surplus. In a crisis, the creditor always calls the shots.
Sure, this is not a position Germany or Chancellor Merkel ever desired
and they are understandably reluctant to embrace it. But the fact is
that Germans are now in the position of dictating to Europe what the
solution to the euro crisis is.
SPIEGEL: Why should Berlin embrace that idea?
Soros: There is simply no alternative. If the euro were to break
up, it would cause a banking crisis that would be totally outside the
control of the financial authorities. So it would push not only Germany,
not only Europe, but also the whole world into conditions very
reminiscent of the Great Depression in the 1930s, which was also caused
by a banking crisis that was out of control.
SPIEGEL: What, then, needs to be done to fight this crisis?
Soros: I think there is only one choice. It is not a question of
whether Europe needs a common currency. The euro exists, and if it were
to break apart, all hell would break loose. Germany has to make it work.
To make it work, you have got to allow the members of the euro zone to
be able to refinance the bulk of their debt on reasonable terms. So you
need this dirty word: “euro bonds“. But when you study what it involves
to have euro bonds, you really have a problem because each European
country remains in control of its own fiscal policy, and you have to
rely on the country to meet its financial obligations.
SPIEGEL: Germans hate the euro bonds idea. They fear that under
this scenario they will ultimately need to bail out everyone, even large
nations like Italy.
Soros: That is why you need to establish fiscal rules that will
ensure the solvency of every member. This should make the euro bond
acceptable to German voters. Europe needs a fiscal authority that has
not only financial but also political legitimacy. The difficulty is
agreeing on the rules. Unfortunately, Germans have some funny ideas.
They want the rest of Europe to follow their example. But what works for
Germany can’t work for the rest of Europe: No country can run a chronic
surplus without others running deficits. Germany must propose rules
that other countries can also follow. These rules must allow for a
gradual reduction in indebtedness. They must also allow countries with
high unemployment, like Spain, to continue running cyclical budget
deficits until they recover.
SPIEGEL: More and more economists, especially in Germany, would
like to see Greece leave the European Union. Do you consider that to be a
Soros: I think that the Greek problem has been sufficiently
mishandled by the European authorities that this may well be the best
solution. Europe, the euro and the financial system could survive Greece
leaving. It could survive Portugal leaving. And the remainder would be
stronger and more easily managed. But the financial authorities have to
arrange for an orderly exit in order for the European banking system to
survive it. That will cost money because the European banking system
including the European Central Bank has to be indemnified for its
losses. Depositors in Greek banks also need to be protected. Otherwise,
depositors in Irish or Italian banks will not feel safe.
SPIEGEL: Is the current crisis even worse than the one in 2008?
Soros: This crisis is still the continuation of the same crisis.
In 2008, the financial system collapsed and it had to be put on
artificial life support. The authorities managed to save the system. But
the imbalances that caused the crisis have not been removed.
SPIEGEL: What do you mean?
Soros: The method the authorities rightly chose three years ago
was to substitute the credit of the state for the credit in the
financial system that collapsed. After the failure of Lehman Brothers,
the European financial ministers issued a declaration that no other
systemically important financial institutions would be allowed to fail.
That was the artificial life support; it was exactly the right decision.
But then Chancellor Merkel stated that such support would only be
granted by each EU member state individually, and not by the European
SPIEGEL: That undermined the concept of a strong European response to the crisis. Has that been the biggest mistake so far?
Soros: That Merkel statement was the origin of the euro crisis.
It shattered the vision that the EU will protect the euro in a joint
SPIEGEL: Where will the current crisis stop? Even France now seems to be threatened by a financial meltdown.
Soros: Of course it is spreading. Markets fear uncertainty.
Germany has to realize that it has no alternative but to defend the
euro. The longer it takes, the higher the price Germany will have to
SPIEGEL: You have been very critical of how the crisis has been
handled by governments. Many European citizens, however, blame
speculators like you for their attempts to bring down the euro. Huge
hedge funds like yours have waged massive bets against the European
currency over the past year. And in recent days, several European
countries have even imposed temporary bans on short selling, bets on
falling share prices.
Soros: You are confusing markets and speculators. At the moment,
the biggest speculators are the central banks because they are the most
important buyers and sellers of currencies. Hedge funds have definitely
been supplanted by central banks. Markets expect the authorities to
produce a financial system that actually holds together. If there is any
hole in that system, speculators will rush through that hole.
SPIEGEL: That sounds very noble. But in reality, speculation
makes any crisis worse. Look at the credit default swaps (CDS) market
where speculators can bet on a further decline of currencies and
economies. How can that be helpful?
Soros: Of course, speculation will always make a crisis worse. If
there is a weak point, it will expose it. And you are right, the CDS
market is a very dangerous instrument and I think it should not be
allowed. I am one of the very few people who argue that the CDS is a
dangerous instrument because it is so lop-sided in favor of a negative
SPIEGEL: Do you think the European Central Bank is part of the
solution or part of the problem when it comes to the dealing with the
Soros: It is part of the solution, but which part? Any central
bank should only be in charge of liquidity. Solvency is a matter for the
treasury. But because there is no European treasury, the ECB was pushed
into that arena. To keep the financial system alive they overstepped
their limits, as the former German Bundesbank president
pointed out, by discounting the government bonds of a country that was clearly bankrupt.
SPIEGEL: You are referring to the purchase of Greek bonds. Now
the European Central Bank even started buying Spanish and Italian bonds.
It is not even clear, however, if it is legally allowed to do so.
Soros: Yes, but there is a well-established conviction that the
central banks always do what is necessary to keep the system going and
then afterwards you then take care of the legal aspects. In a crisis,
you simply do not have time to think about such concerns for too long.
SPIEGEL: The United States is drowning in even more debt than
Europeans. Its economic recovery has been painful. Are we going to see a
double-dip recession in the US?
Soros: The indebtedness of the US is not all that high, but if a
double-dip recession was in doubt a few weeks ago, it is less in doubt
now, because financial markets have a very safe way of predicting the
future. They cause it. And the markets have decided that America is
going to see a recession, particularly after the recent downgrade of the
US by the rating agency Standard & Poor’s.
SPIEGEL: President Barack Obama has been fiercely criticized for
his handling of the economy. You were one of his biggest supporters in
2008. Are you happy with his economic policy?
Soros: No, of course not. But the reality is that we have had 25
years of excesses building up in America — a combustible mix of too
much credit and too much leverage. You need a long time to reverse that.
SPIEGEL: Obama tried to stimulate growth with a gigantic stimulus program which increased the national debt further. Was that a mistake?
Soros: Obama embraced the ideas of John Maynard Keynes.
Basically, the analysis of Keynes is still very relevant — with one big
difference between now and the 1930s. In the 1930s, governments had
practically no debt and could therefore run deficits. Nowadays, all
governments are heavily indebted, and that is a big change.
SPIEGEL: If Keynes were still alive, would he adjust his theory?
Soros: Definitely. He would say governments can still benefit
from running fiscal deficits, but the new debt has to be invested in a
way that will pay for itself. So the money spent would have to increase
SPIEGEL: The $800 billion stimulus program launched by Obama did not live up to that?
Soros: Obama’s stimulus program was not big enough and it was not
directed at improving infrastructure nor human capital. So it was not
SPIEGEL: And any further stimulus is now basically a non-starter,
because the conservative majority in Congress is hell-bent on
Soros: That is what is pushing the world towards another recession, into a double dip.
SPIEGEL: The Republicans are doing that?
Soros: Yes, but Obama is also at fault. He yielded the agenda to
the Republicans. He is talking their language. The president would have
to show leadership to counter the Republican wave, and so far he has not
SPIEGEL: Do you think the US deserved the recent downgrade by Standard & Poor’s?
Soros: Probably not. This decision was the attempt by the rating
agencies to reinvent themselves as anticipating rather than responding
to changes that have occurred. So they are really basing that downgrade
on the expectation that the political process will not provide the
solution. Judging such political developments is a very new role for the
rating agencies, though.
SPIEGEL: As an investor, do you listen to the rating agencies?
Soros: Well, I do not, but many other investors do.
SPIEGEL: The credit rating agencies are accused of exacerbating
the crisis. Do you think the role of the rating agencies in the
financial system needs to be scaled back?
Soros: I do not have an answer to that.
SPIEGEL: There are no alternatives.
Soros: Frankly. It is an unsolved problem in my mind
SPIEGEL: As an investor, would you still bet on the euro?
Soros: I certainly would not short the euro because China has an
interest in having an alternative to the dollar. You can count on China
to back the efforts of the European authorities to maintain the euro.
SPIEGEL: Is that the reason why the euro is still so strong compared to the dollar?
Soros: Yes. There is a mysterious buyer that keeps propping up the euro.
SPIEGEL: And it is not you.
Soros: It is not me (laughs).
SPIEGEL: In the end, will China be the only winner in this crisis?
Soros: China, of course, has been the great winner of
globalization, and if globalization collapses, the Chinese will also be
among the losers. So they have a strong interest in preserving the
current global system. However, in some ways, they have been just as
reluctant to accept it as the Germans. Germans have been hesitant to
accept responsibility for Europe, and the Chinese have been hesitant to
accept responsibility for the world. But they are both being pushed into
SPIEGEL: Mr. Soros, we thank you for this interview.