In an essay published in the most recent edition of The New York Review of Books and in a speech delivered in Berlin Monday, Soros pins Europe’s fiscal problems on the Maastricht Treaty’s failure to create a common European treasury. In the absence of such an institution, Soros believes that it is incumbent upon the wealthy euro-zone creditor nations, particularly Germany, to accept the financial responsibilities of debtor states.
This step would accomplish two key objectives, Soros writes in his essay. One, it would establish a “level playing field” between capital rich creditors and struggling debtors, such as Greece and Italy. And two, it would enable the euro zone to grow its way of its debt problems, although Soros’s plan also would require the euro zone to temporarily take on higher levels of inflation.
Currently Germany’s leadership is pursuing policies that Soros believes will hold the euro together for a while. However, they do not represent a permanent solution. This is not good enough, according to Soros, because the European Union that will emerge from this process will be a bifurcated monetary union with a hierarchy divided into two classes: creditors and debtors.
To avoid this fate, Soros believes that it is incumbent upon Germany to either save the euro zone or get out of the way.
“In my judgment the best course of action is to persuade Germany to choose between becoming a benevolent hegemon or leaving the euro,” Soros writes. “In other words, Germany must lead or leave.”
Although Soros believes that there would be some short-term disruptions if Germany left the European Union, if Germany is determined to continue on its current course its departure would ultimately save the euro zone.
“If Germany left, the euro would depreciate,” Soros writes. “The debt burden would remain the same in nominal terms but diminish in real terms. The debtor countries would regain their competitiveness because their exports would become cheaper and their imports more expensive. The value of their real estate would also appreciate in nominal terms, i.e. it would be worth more in depreciated euros. The creditor countries, by contrast, would incur losses on their investments in the euro area and also on their accumulated claims within the euro clearing system. The extent of these losses would depend on the extent of the depreciation; therefore creditor countries would have an interest in keeping the depreciation within bounds.”
To read the entire essay, click the link below.
Link: The Tragedy of the European Union and How to Resolve It
