Monday, June 4, 2012

Soros Predicts Euro Will Survive but Could Create "German Empire"

Billionaire trader, currency speculator and all around global manipulator, George Soros, made the following comments thus weekend at the Festival of Economics, Trento Italy:
The real economy of the eurozone is declining while Germany is still booming. This means that the divergence is getting wider. The political and social dynamics are also working toward disintegration. Public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed. So something has to give.

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.

I expect that the Greek public will be sufficiently frightened by the prospect of expulsion from the European Union that it will give a narrow majority of seats to a coalition that is ready to abide by the current agreement. But no government can meet the conditions so that the Greek crisis is liable to come to a climax in the fall. By that time the German economy will also be weakening so that Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities. That is what creates a three months’ window.

Correcting the mistakes and reversing the trend would require some extraordinary policy measures to bring conditions back closer to normal, and bring relief to the financial markets and the banking system. These measures must, however, conform to the existing treaties. The treaties could then be revised in a calmer atmosphere so that the current imbalances will not recur. It is difficult but not impossible to design some extraordinary measures that would meet these tough requirements. They would have to tackle simultaneously the banking problem and the problem of excessive government debt, because these problems are interlinked. Addressing one without the other, as in the past, will not work.

Banks need a European deposit insurance scheme in order to stem the capital flight. They also need direct financing by the European Stability Mechanism (ESM) which has to go hand-in-hand with eurozone-wide supervision and regulation. The heavily indebted countries need relief on their financing costs. There are various ways to provide it but they all need the active support of the Bundesbank and the German government.

That is where the blockage is. The authorities are working feverishly to come up with a set of proposals in time for the European summit at the end of this month. Based on the current newspaper reports the measures they will propose will cover all the bases I mentioned but they will offer only the minimum on which the various parties can agree while what is needed is a convincing commitment to reverse the trend. That means the measures will again offer some temporary relief but the trends will continue. But we are at an inflection point. After the expiration of the three months’ window the markets will continue to demand more but the authorities will not be able to meet their demands.

It is impossible to predict the eventual outcome. As mentioned before, the gradual reordering of the financial system along national lines could make an orderly breakup of the euro possible in a few years’ time and, if it were not for the social and political dynamics, one could imagine a common market without a common currency. But the trends are clearly non-linear and an earlier breakup is bound to be disorderly. It would almost certainly lead to a collapse of the Schengen Treaty, the common market, and the European Union itself. (It should be remembered that there is an exit mechanism for the European Union but not for the euro.) Unenforceable claims and unsettled grievances would leave Europe worse off than it was at the outset when the project of a united Europe was conceived.

But the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany. It would leave Germany with large unenforceable claims against the periphery countries. The Bundesbank alone will have over a trillion euros of claims arising out of Target2 by the end of this year, in addition to all the intergovernmental obligations. And a return to the Deutschemark would likely price Germany out of its export markets – not to mention the political consequences. So Germany is likely to do what is necessary to preserve the euro – but nothing more. That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments. That would turn the European Union into something very different from what it was when it was a “fantastic object” that fired peoples imagination. It would be a German empire with the periphery as the hinterland.

I believe most of us would find that objectionable but I have a great deal of sympathy with Germany in its present predicament. The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.

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.

A few points. I'm not even sure the eurozone has three months. If the summit taking place at the end of this month, that Soros mentions, does not come up with something solid that "the markets" believe in, the run on banks in Greece and Spain will likely intensify at that point.

Either, the ECB continues to print to provide funds for Greek and Italian banks at that point or it is game over. If it is money printing, then it will be a stealth bailout program.

But, Soros is wrong, the creditors don't hold all the cards, it is really a game of chicken between debtors and creditors, with the debtors not caring if they win. They have options. The debtors can simply refuse to pay bankster debt and see if the German's pay the bills (Through agreed upon ECB money printing). If the German's fail to agree to such a program, the Greeks can leave the EZ, return to the drachma and default on the debt or pay it out in devalued drachma.

The banksters are pushing for the Germans to agree to a further bail out and they are using the crisis to force a tighter fiscal union. In many ways such a union will, indeed, look like a German empire with a hinterland.

But, when you come down to it, it's the people versus the banksters. Will the officials of EZ countries turn their rule making authority over to a unified EZ or will the people of the EZ countries raise enough hell to prevent such an occurrence.

The clock is ticking and as Soros says:
It is impossible to predict the eventual outcome...But the likelihood is that the euro will survive.
And that will be terrible for freedom loving people throughout the EZ, as the central planners will be doing more central planning over a larger area as part of the plan to "save" the euro.



  1. "But, Soros is wrong, the creditors don't hold all the cards"

    This must be the Soros for public consumption side. Creditors are only in the driver's seat when their debtors have their accounts current or at the very least have enough collectible assets to cover their account. Any lender will tell you that. Pure BS!

  2. The average Europeans are being fed for quite a while now with dripping social engineering goo; small voter empty promises, somebody else money for not working government benefits,free this and that. The transformation is profound and truly astounding. They have become dumb and indecisive midgets waiting for their daily crumbs. Blinking like a dear in the headlights,and not knowing how to pull a quick Icelander on the asset stripping banksters.

  3. Robert,

    See if you can do a podcast with Max Keiser on this. I think it'd be interesting to hear you two discuss.