Soros: The Tragedy of the European Union and How to Resolve It

A well reasoned and well written article. I find it hard to believe that for example the Irish and Spanish Gov’ts did not understand that the EZ did not have a Treasury and that they would not be in complete control of Sovereign Bond issuance, Liquidity and domestic interest rates. Both Gov’ts were brought down when their domestic banks acted as conduits between core country large banks awash in cash and eager borrowers for mortgages, credit card debt, vehicles and private consumption in general. In an age when gov’t security agencies can tell me what I spent and where, for the past five years, I find it hard to believe Gov’ts are not monitoring the fund flow and identifying problem trends long before the crisis hits.

In my opinion what the Spanish and Irish Gov’ts did not understand is that the Sovereign must be protected at all costs. If that means putting domestic banks in receivership (examinership) then so be it. In an economy lacking sound collateral even the healthy banks will not lend. In countries where the Gov’ts are going into debt beyond their capability to repay businesses are reluctant to invest and individuals focus on building a buffer for hard times.

While I respect Soros, I do not agree that Gov’ts “not knowing” is at the root of the problem. Not monitoring, controlling and regulating I would buy.

” … aiming at nominal growth of up to 5 percent, in other words allowing Europe to grow its way out of excessive indebtedness …!

5% growth! The man is sleepwalking! Growth (aggregate economic) as we knew it is over and will not come back. OK, 1% or some such figure. This will not suffice to repay debts (which are accumulating). I suspect that this outcome is known and understood (not widely) and those with the requisite power are taking steps to safeguard themselves. Mainstream politicians will do as much as they can to preserve things – for as long as they remain in office. The mavericks are another matter altogether.

Things will fester along for a couple of years yet – until energy and food costs start to escalate beyond control. 2015 looks promising.

Much more here than I can take in at the mo – will comment some more later on.

That said:

“In the aftermath of the Lehman Brothers crisis, Angela Merkel declared that the guarantee that no other systemically important financial institution would be allowed to fail should be given by each country acting separately, not by the European Union acting jointly. That was the first step in a process of disintegration that is now threatening to destroy the European Union.”

With this disastrous move Angela Merke abandoned the core ‘Principle of Solidarity’ at the heart of the European project. Had she adopted the “collectivist” approach rather than push the “individualist” state approach this crisis could have been well sorted by now. History will not be kind to Frau Merkel.

Minor point: Not all Germans are opposed to EuroBonds (collectivist) as both the SPD and the Greens (potentially the next Gov) have commented favourably on same.

The Job of the ESM is to bankrupt us all.

Mario Draghi’s comments when asked a question on debt relief deal for Ireland.

“IRELAND IS AN EXCELLENT EXAMPLE OF COMPLIANCE”.

I understand you never change things by fighting the existing reality, we build a new model that makes the existing model obsolete.

Ireland’s political landscape WILL be redesigned.

I am a self employed pizza maker, not an academic, no doubt you will
pick many holes in my argument.
I watched children starve in Africa, from that experience I did learn when the chips are down what REAL money is. Mario Draghi and Ben Bernanke will destroy the world before they are finished with their printing press. This long comment is addressed to those of you who support this policy. I ask you to reconsider.

The value of fiat currency is going to nil.
I refer to the reduction in the purchasing power of the Euro,Dollar etc.etc.
The value of paper money is based entirely on FAITH. Since there is nothing behind paper money but the obligation of a state to redeem it in more paper or electronic money. Fiat currencys worth is questionable at best. There is a history of states every 27/40 years walking away from the face value of fiat money. It is impossible to walk away from the value of Gold and silver, because sound money is itself a commodity.
Gold and Silver coins as precious metals with intrinsic value will never impoverish their owners in the same way that paper money has.
Why are you paying more in the last 6 months for petrol, why are you paying more for food, Gas, ESB.
Every time the ECB prints more Euros the purchasing
power of the Euro drops, and prices rise.
The creation of paper currency does not cause inflation. IT IS INFLATION, and inflation is a tax on the poor. Trade unions should be looking at the quality of money not the quantity.

It was not the lack of money that caused this problem, it was the flood of money that caused it. Governments have always sought to monopolise the issuance of currency, either directly or through the creation of central banks, but the price we pay is the terrible and ongoing debasement of our money.

This is the cause of global poverty, on a massive scale.
The US$ has lost 40% of its purchasing power in the last 4 years alone because they print $ nonstop, Oil is priced in $, Wheat is priced in $, the USA use the printing press to pay for their wars and people starve all over the world as a result, due to the increase in the price of food caused by constant inflation. We also pay every time we fill up at the petrol station and buy bread, whatever chance we have in Ireland of
coping with the constant price increases, the 3rd. world has no hope.
This is a very serious moral issue. I ask you, what is the point in spending money
on overseas aid while at the same time we support a monetary system which is responsible for starvation.
I do not give a fiddlers about gold or silver, it is just a means to control corrupt banksters and politicians, as they are unable to mass produce Gold and Silver to buy votes and conduct wars.
We live in a society where if you are very ,very rich you get a bailout.
If you are poor you get a hand out.
If you are in the Middle you get left out and wiped out.
That is no way to run a country.
This very, very serious situation is only starting.
When a nations bond market collapses, so does its currency. The USA is purchasing 70% of its own debt because no one wants their bonds, so too the ECB is funding the banks to buy EU bonds because no one wants them. It is hard to miss the connection between the monetary policy that brought the housing market down, which will in turn bring down the bond market. When sufficient money is printed and pumped into bonds they will loose their value just as housing did, then the GAME IS UP for all of us.
Banks hold our bonds as tier one capital and we guarantee them as part of our soverign debt.
I will repeat, the bond market will go the same way
as the housing market. Then your fiat currency is worthless.

The head of our Central bank can encourage the bond buying spree, he does not look after your interest, just remember, his job is to protect the banks at all cost, NOT THE PEOPLE.
When the ECB forced us to do the bailout they broke international law, under Odious debt. There is a legal case before the Irish courts which the media does not cover. Why????? =
Change is coming.
The powers that be are busy planting the seed in the media that the drought in the USA will cause global starvation, if you buy that story you are not looking at the facts.
Ben Bernanke and Mario Draghi should be arrested and tried for crimes against humanity.
We must have change and we will have change.

@OMF

Europe since Roman times has a record of fierce competition leading to frequent and destructive wars. In modern times this has manifested itself as economic competition, competitive devaluations, jingoism and wars. The latest being Franco/German, WW1 and WW2.

Competitive devaluations with Italy in the lead was already being practiced long before the EZ was formed. Sane and rational policy wonks could see what was coming down the well trodden tracks to war. The EZ was the rational response. People in Germany take umbrage when I say another European war cannot be ruled out. They say in this day and age we are civilised, modern, educated and war is out of the question. My answer is civilisation is the same depth in Ireland as it is in Germany and that is skin deep.

The Nazi’s are back. Clare leonard you are a Nazi. Perhaps you are the the Dork from whereever.

@ PL

Many thanks for link. A highly persuasive contribution by Soros but also (i) giving inadequate emphasis to the failures on the part of the debtor nations and (ii) undue emphasis to the responsibility of Germany.

Wolfgang Munchau has a sobering piece in this morning’s FT about the demons that may have been released – with Merkel carrying a major responsibility – and a pessimistic view as to the future.

http://www.ft.com/intl/cms/s/0/130ad186-f82c-11e1-bec8-00144feabdc0.html#axzz263RkJqIh

George Soros is correct in stating that the EMU structure was fundamentally flawed from the outset.

However, it was France who pushed a reluctant Germany to agree to the euro.

The UK objected to reunification and France fearing a new economic powerhouse, pushed for a closer union. Remember Jacques Delors?

After the Lehman Brothers crash, no German government of whatever hue would have survived agreeing to pooling responsibility for bank debt.
What countries are prepared to do on both sides of the divide have evolved in the interval – – but not much.

On growth, there is poor economic data out over the weekend and today, from China and Japan.

China’s fear of stoking inflation and prices of staples for its still poor population and property prices for the emerging middle class, suggests reluctance to become an engine of growth.

It is reasonable to wonder if George Soros has lost or gained from the crisis?

This from The Wall Street Journal, Feb 26, 2010 on a dinner for hedge fund managers to plot strategy on the euro:

At the Feb. 8 “idea dinner” hosted by Monness, Crespi, Hardt & Co., a boutique research and brokerage firm, three portfolio managers spoke about investment themes related to the European debt crisis.

During the dinner—featuring lemon-roasted chicken and filet mignon at a private townhouse in Manhattan—a Soros manager predicted that interest rates are going up, people close to the situation say.

Donald Morgan, head of hedge-fund Brigade Capital, told the group he believed Greek debt is an early domino to fall in a contagion that eventually will hit U.S. companies, municipalities and Treasury securities.

Mr. Einhorn, meanwhile, who was among the earliest and most vocal bears on Lehman, said he is bullish on gold because of inflation concerns. Mr. Einhorn declined to comment.

By the week of the dinner, the size of the bearish bet against the euro had risen to record levels of 60,000 futures contracts—the most recently available data and the highest level since 1999, according to Morgan Stanley. The data represents the volume of futures contracts that will pay off if the euro sinks to specific levels in the future.

Three days after the dinner, another wave of selling hit the euro, pushing the currency below $1.36.

@Michael H

“The UK objected to reunification…”

They say you learn something every day.

Eh?

“Spain is much healthier politically but the current government has become far too subservient to Germany for its own good. Moreover, the reduction in risk premiums as a result of the ECB’s bond purchases will be significant enough to remove the incentive to rebel against German domination” You could sub Ireland for Spain in that comment. It might explain the recent announcement of delays in bank debt deal.

Re his desire for 5% growth.
I think he is fully aware that this would require yanking up the printing presses and governments would have to create the growth by increasing debt. However he believes that if the whole Eurozone is paying the same cost for that debt then the interest rates charged will be kept low enough for all.

Not saying I agree but for those asking where is 5% growth coming from, I think that’s the answer he is ascribing.

@ em: “… would have to create the growth by increasing debt.”

Growth via credit (debt) creation is a very nifty definition of a Ponzi scheme. Ponzi went for a state funded vacation to Sing Sing.

Since this site is meant to have a minimal academic input: – your accumulating debt is meant to be subtracted from your income.

Its not Y = C + G + I + NX, but Y = C + G + I + NX – D

(Ok, so I have take a liberty here, but the basic idea is self-evident – I hope)

OK, so some credit IS necessary, but it metamorphoses instantly into debt (which accumulates geometrically) so your expected future income increase MUST parallel the geometric increase in debt. In a real physical system this match between debt accumulation and income increase is only possible in the short-term. It quickly reaches the treshold of Diminishing Marginal Return (more credit emission actually suppresses economic activity) and is completely impossible in the long-term. The inability to grasp this reality or to dismiss it as being irrevelant is the principle intellectual causal factor for our current economic and financial disaster. Would some economist please attempt to ram this home. Above a certain level debts become unpayable and MUST be written off. Not written down or rolled-over.

Soros could have said this. But he did not. Now I wonder why?

Is growth really over? Okay for political reasons its not going to happen, but surely a green new deal(say green QE and a serious carbon tax for starters) is desirable and necessary. Coupled these with a slightly higher inflation target and suddenly 5% growth isnt so out of the question.

There’s no ‘new economics thinking’ from Soros despite his ‘INET’ pretence otherwise.

Cutting out all the contortions, all he’s saying is that a fixed exchange rate regime without the function of a common fiscal authority is a f**d up idea & not sustainable if some of the members don’t want to become debt peons to the others. No sh1t sherlock.

So his answer is to adopt something similar, tho’ probably even less functional, to the US or UK etc. Same old neo-liberal model of the last few decades.

But five years on from the burst bubble they are doing little better than the Eurozone with the massive loss of real output that 15% plus unemployment (including those not included in the official stats) entails. And no plan or prospect of restoring near full economic activity this side of the next decade, if at all.

5% growth? Bullsh1t! All he has a plan for there is inflation, no real growth at all. Just more of the same growing inequality and reduction or stagnation in aggregate demand that is the core problem. (Tho’ not a problem if you are one of the top few percent, that is, who continue to profit & build net worth.)

There’s no need whatever for governments with fiat, free floating currencies to incur debt in order to spend to stimulate & maintain near full employment & economic output. To do otherwise is merely preserving the private banking monopoly on issuing all new money as debt – more free lunch for the rentiers for no productive purpose. Doubtless billionaire Soros’ underlying agenda.

@MH

“By the week of the dinner, the size of the bearish bet against the euro had risen to record levels of 60,000 futures contracts—the most recently available data and the highest level since 1999, according to Morgan Stanley. The data represents the volume of futures contracts that will pay off if the euro sinks to specific levels in the future.”

You might be interested to know that that futures position had doubled by May 2010. The Euro was then at 1.2. Four months later the Euro was at about 1.4, during which time the net spec short position was unwound from 120,000 short to 60,000 long. The Euro then fell. How profitable currency speculation is!

A couple of months or so ago I noted there was record speculative short positioning against the Euro amid every Tom Dick and Harry talking head targeting a fall from 1.25 or so to 1.10-1.15. The same measure as above was almost 200,000 contracts short. The Euro hardly budged in their direction and may of these have now been closed out at a loss.

To the extent Soros or anyone can profit from speculation it is by either spotting something early, or by positioning against the herd – much much harder to do than to say.

If he can spot a government denying reality he will probably act. Those less quick to work things out will probably follow and the muppets then pile on.

Officials and politicians would have served Europe more effectively if they had listened to the analysis coming from independent minded analysts rather than pretending the only thing dodgy about Irish banks or Greek government finances was in the imagination of ‘locusts’ as they are known in parts of Germany. They could have acted before the muppets arrived.

@ David O’Donnell

In reality, it wouldn’t be Germany alone.

Then France would have to make a choice.

It’s always easy to say a big fall in the currency would trigger a jump in external demand for goods and maybe services.

That word competitiveness is as abused as innovation.

Where is the evidence from past devaluations.

As someone else asked, where is Britain’s export miracle or is a dip of 25% not enough?

@MH

France is surprisingly weak throughout this crisis … agree on ‘competitiveness’ … such a word is meaningless unless one has an expanison of firsm into product and service markets that matter – and Irish smes have a rather limited range of these ….

big problem is that German Public Sphere has been fed ‘porkies’ by its leadership and this is really difficult to reverse in order to explain its gains and responsibilities ….

As for Italy, it is estimated that the Mafia turns over 150 or so and makes a profit of 100 billion or so: a 50% tax on such profits would work wonders for its deficit!

@ em: Yeah, its complex alright and my adopting a simplistic explanation is not very helpful. But its infuriating that the academic economists that could contribute and comment are not doing so. I have no idea whether or not they actually understand the reality of an economic system embedded in a physical reality with resources that are limited and finite. Is puzzling.

What I do know is that my challenge to them to clearly specify their economic Model-in-Use has never been taken up. I can surmize its the Permagrowth paradigm. If they accept and endorse Permagrowth then they are failing to engage in a meaningful intellectual manner with reality. Whereas if they reject Permagrowth and accept an alternative (sustainable) economic paradigm all their Theories-in-Use have to be junked in favour of the alternatives. That’s a most unappealing prospect.

For those who think Soros is up to something and can’t be trusted, here is the alternative:

http://ftalphaville.ft.com/blog/2012/09/10/1152161/german-domino-theory-and-book-cooking/

re- Maestronomo:’“benevolent leadership”. This guy is taking the piss. Define benevolent. He talks a lot about not very much. ‘

Indeed. A benign dictator, in theory, could provide a perfect government.
I prefer the faltering yet enduring and resolute journey towards fairness, justice and solidarity that grows within co-operating, self-determined sovereign nations – sans the bogey of attritious nationalism that is another beast altogether, though Soros would like to pretend otherwise.
The centralising of power that accompanies every instance of political universalism is something to be deeply wary of.
As you seem to identify, there is a worrying doubt underlying Soros’ sham ‘benevolence.’
It’s almost unnecessary to make jokes in the direction of past instances of German ambitions of ‘leadership’ with this sort of guff…..

Soros has some skin in the game for sure

@ All

Der Spiegel has now also picked up on the Schroeder Lafontaine confrontation.

http://www.rp-online.de/politik/deutschland/schroeder-versus-lafontaine-1.2988884

The German audience was, of course, mainly concerned with the domestic implications of Agenda 2010. The problem for Europe, and the EA in particular, is one of which the audience is either unaware of or chooses to ignore. It is impossible to hold up Germany as an example of other countries of Europe to emulate, as Schroeder does, for the simple reason that it is a logical impossibility for all countries to run export surpluses with one another, especially when that of the largest, Germany, runs to nearly 6% of GNP.

Of course, the argument can be advanced that the downturn in the EU has corrected the situation, a fact which is a mixed blessing, to put it mildly. However, this reasoning ignores the fact that German exporters have over the ten year period stolen other EU competitors’ lunch.

Either there is a correction in the direction of German economic policy or the euro, and possibly the EU, are history.

The Japanese, like Italy in the past, presumably can sell their bonds to their own savers and insurance companies etc.

@ De Roiste

Japan’s net debt is about 130% of GDP.

Apart from big pension funds, companies with lots of cash invest in so-called JGBs — more than 90% are held domestically.

More than a third of the workforce are temps earning less than the Irish minimum wage – – not a good societal setup in an ageing society.

Most of the big Japanese companies were founded before 1975 and Sony hasn’t reported a profit in more than 4 years.

In Asia, Japan came second last to Laos in an IMF test of the use of English as a business language.

GDP growth in 2001-2012 was an average of 0.8% in line with Germany’s.

Per capita GDP beat US, Germany, France and the UK.

@ em: I culled these quotes from the DMcW piece. This diminishes the context, but not much.

“Europe has a growth crisis. ” Affirmative. But why?

“Without growth, all plans falls apart”. Affirmative. Terms + conditions will apply.

“Europe will see a massive fiscal expansion in the years ahead, and this fiscal expansion will kickstart the moribund eurozone economy.” Eh, no. It will lead to another asset bubble. Thought this was the ‘lesson’ we were meant to have learned from the 2002 – 2007 era. Seems not.

“Domestic demand will have to drag Europe up.” Note the ‘have to’. Demand for what? Cheap and cheerful goods from where? We need to make stuff and trade it abroad.

ProgressiveEconomy is a cemetry with lights (low wattage). All econonomists (of the pseudo species) have an anality with Permagrowth. Real economists on the otherhand understand the consequences of the physical law and the limits of finite resources and technology in the real economy. “Nature is not fooled” :[Richard Feynman].

Aggregate economic growth is limited in a physical system. It will reach that limit (probably already has). It will plateau for a while (decade?) then it will inflect into a decline. So anyone advocating any policy which has a mandatory ‘growth’ element is ‘whistling past the graveyard’.

The intelligent politicians are ‘girding their loins’ and gathering their harvest into their barns. The dopey ones (ours are a prime example) are blowing about the place in ever desperate attempts to shore-up their own popularity.

Its a debt Jubilee that is required. Not fiscal stimuli. Our politicians are money spending addicts. Some adult needs to cut off their supply, not increase it.

@ BWS

This post is more to try to pick your brain than anything else.

I am hoping you can comment on what I am saying so that i can learn about where you are coming from.

This is what I think is the plan in Europe now that Mario has convinced Germany to start the printing presses. So what is printing money. This is essentially devaluing the wealth held in Euro, and transferring that wealth to those who sell the goods and services that is bought with the printed money also all the multiplier effects that result. Now a lot of the printed money goes back into the hands of those who held the original wealth (Wealthy companies and individuals) but some of it trickles down to the serfs. Its no longer sitting in a bond or cash account gaining interest, it is being invested by the government. So its a partial wealth transfer from rich to poor.
Now what about the additional debt that has been created?
Well I believe their intention is that they will also devalue this debt over time. Soros is saying that if all of Europe is allowed to borrow at the same rate of about 2-3% but they can grow the economy at 5% through government investment it will bring the debt burden down the debt is also being devalued as the currency is being devalued. Again as Soros points out; Why are the US and UK and Japan able to borrow at such Historically low rates when their Debt to GDP’s look worse than Europe’s? The only thing preventing Europe as a whole getting these low rates is disastrous policy that is putting them at a huge disadvantage. It looks like the policy is changing but the benefactors of the existing policy have been those who hold massive wealth and have been getting 5-7% returns. This has been a transfer from serfs to wealth. This is the process that needs to be reversed.

Can we have permagrowth when growth does not require any growing, but growth is merely an expression of demand for new goods and services and we can manufacture demand and growth by printing currency?

The capitalist system does require permagrowth but does it care about the quality of the growth or how the growth is derived/manufactured?

This is the big question that divides America at the moment with Paul Ryan on one side and Paul Krugman on the other.

This is not certain but what is certain is that the path of least resistance in Europe right now is to create demand through public sector spending. The alternative is to carry on as we are or break up the Euro. They were the alternatives Mario gave Germany.

Eamonn, I had a real difficult job to fashion a simple response. I wrote several pieces but each was inadequate. So I have distilled out the salient bits.

There are two types of economies: a Production-Consumption [PC] economy and a Finance, Insurance, Real-estate and Education [FIRE] economy. The former is real, is embedded in physical reality and is limited by the Physical Law. Using energy it transforms raw materials into goods which are sold. (for profit). The PC economy spawns lots of services (to improve its efficiency and productivity). Finance is one of those services.

FIRE is a virtual economy. It is a parasite hosted by the PC economy (it maximizes rents). It has grown to control its host. FIRE has one raw material: virtual credit. It has one polluting output: real debt. Debt is a lien on real future income. Debt grows geometrically whereas incomes usually grow arithmetically. In recent years the overall trend in incomes (apart from financial services) has been downward. Something had to give, and it has. The levels of debt have become unpayable unless you flood the economy, not with more virtual credit but with real cash being paid directly to individuals. If they pay down their debt with the cash then the debt is retired and the cash is destroyed. No harm all round. But that is not what is being proposed.

Yes the ‘money supply’ will be increased, but with credit. This will not result in debts being retired (debts will actually increase!- have to keep the rents coming in) and there will be asset and commodity bubbles.

The whole thing is irrational. Except your a politician who desperately need to be re-elected. Now nothing is irrational.

Why do you need to create demand? For jobs? Oh yeah! No jobs no votes? Is that it? I believe so.

“Now step right over here. Would you like to see the latest in robot technology? Look! No humans!” Gee, that’s a cheerful message. But robots are not credit consumers. We need wage and income earning humans for that. Hmmmmmm.

Mario and crew are like cardiac surgeons giving a patient with blocked arteries (with plaques of debt) a quadruple by-pass. The operation will be successful, the patient will recover to live a more comfortable life, but the prognosis is still terminal!

Its a Marx brothers farce – for real. And its very unfunny.

Am I Left or Right Wing? I’m neither, but I am both. I’m a scientist. I came upon economics to see if I could understand why we are in the dreadful mess we are in. I now know why. And it is infuriating to witness our economists (who should also know the causal factors) being so silent and politically submissive. Maybe I am being a bit hard on them. Maybe they are genuinely confused and misled by all that dopey economic theory they attempted to teach me.

Thanks Eamonn.

“He is saying that what he wants to do is increase the amount of debt but decrease its value at the same time and to a greater extent. You can do this either buy growing the economy or inflation.”

This is dopey in the extreme. You MUST remove ALL unpayable debts. However there is this completely barmy economic Model-in-Use which assumes that future incomes will increase to meet future debt repayments. This is mathematically (and physically) impossible. Soros is a bright person so I will only accuse him of being ill-informed and he should do some reading. He could try Albert Bartlett, or Frederick Soddy for starters.

“Money isn’t very logical if you ask me.” This gave me a good laugh. Thanks.

The absolute, inescapable logic is that the retirement of debt destroys money (debt is anti-money). The problem we now face is how we will retire the debt burden that we have (and which is accumulating geometrically) when we know with certainty that our future incomes (if we follow our existing economic Model-in-Use) will be inadequate?

a: A Debt Jubilee – the absolutely unacceptable politically solution. The problem with a Debt Jubilee is that it snuffs out all rental payments, thrashes incomes and credit is no longer available. Its like an asteroid strike on the FIRE economy. Recovery would come. But it would be several decades.

b: Emit more virtual credit to generate more real debt and roll-over (ad infinitum?) the existing debt – the absolutely favoured political solution. The problem with this is that you slowly impoverish a massive proportion of your population to the point that they ‘enjoy’ a subsistence level standard of living.

So, which solution will get the political nod? Its utterly maddening. Where are the academic protestors? What is the accounting difference between giving every debtor the cash equivalent of their debts – to pay the debt down, or just cancelling their debt? None! But there is a difference; so what is it? Any does it really matter?

Thanks again.