In the recent interview with Spiegel, he told that the future of euro depends on Germany as it is the strongest European economy, best credit rating and chronic surplus. If euro broke up, there would be a large banking crisis which will be far out of control of any authorities. To make it work, the members in euro zone should be allowed to refinance their debt on reasonable terms. “So you need this dirty word: “euro bonds””. However, the problem would still exist as each member in euro zone remains control of its fiscal policy, and you have to depend on the country’s capability to meet its financial obligations.
Europe needs to have fiscal authority which covers not just only financial but political legitimacy as well. Soros blamed that Germany would like other members in EU follows their example, but Germany’s situation is way far better than other weaker economies. It has to propose the rule for gradual reduction in the level of members’ debt. And country with high employment like Spain for example, should still run budget deficit until they recover.
After the failure of Lehman Brothers, the European financial ministers have declared that no other important financial institutions would be allowed to fail, Soros though it was the right decision. But Merkel then said that support only made by each EU member individually, not by the EU. That statement somehow goes against the goal of protecting the euro of all members in the EU, and it was the origin of the euro crisis.
The central bank should only in charge of liquidity. Solvency is the treasury’s issue. But European Union has the common currency, but do not have the common treasury. “To keep the financial system alive, they overstepped their limits, as the former German Bundesbank president Axel Weber pointed out, by discounting the government bonds of a country that was clearly bankrupt.”
The United States got 25 years of excesses built up, a mix of very high credit and too much leverage. And it takes quite some time to reverse that. The idea of Keynes is still relevant, only the difference between 1930s and now is in 1930s, the government had no debt so they can have the deficits, but now all government are very heavy debtors. The new debt of the government should be invested to increase the productivity so that it can pay for itself.
The US does not deserve the S&P downgrade. The downgrade happens based on the thinking that the political process would not provide the solution. Many investors listen to the rating agencies, but George Soros doesn’t.
Currently, Soros is not interested in shorting the euro because China is looking for alternative to the dollar. So it is China which can back the maintenance of common European currency. There is the mysterious buyer just keep buying up the euro, and that’s why the euro is still quite strong against the dollar.
The full interview is posted here