INTRODUCTION SOROS: I have been very concerned about Europe. The euro is in the process of destroying the European Union. To some extent, this has already happened, in the sense that the EU was meant to be a voluntary association of equal states. The crisis has turned it into something that is radically different: a relationship between creditors and debtors. And, in a financial crisis, the creditors are in charge. It is no longer a relationship between equals. The fate of Italy, for example, is no longer determined by Italian politics – which is in a crisis of its own, I would say – but rather by the creditor/debtor relationship. That is really what dictates policies.
QUESTION: But the stock markets are apparently in good condition. Why do you think we are in a crisis? Do you think this kind of honeymoon will go on for a long time?
SOROS: The answer is no. We are in what I call a far-from-equilibrium situation. Therefore, it cannot last. But I am not in a position to predict the future.
QUESTION: The spread between German treasury bonds and Italian treasury bonds has decreased despite the current financial difficulty. Do you think this could delay the introduction of Eurobonds – which, if I am correct, you support – as a possible solution to remedy the current discrepancies among rates in Europe.
SOROS: Yes, I think it could, because this could continue, and the discrepancy in the rates would not disappear, though it would remain within a range that could be tolerated for an indefinite period. Of course, it would be a big handicap for Italy, making it more difficult to escape the disadvantageous position it is currently in.
QUESTION: The lack of access to credit on equal terms creates an uneven playing field. This is a handicap for different countries and makes it more difficult for them to regain competitiveness. What should be done?
SOROS: It is important to recognize that this disadvantage consists of two components. One is the cost of borrowing by the government, and the other is the cost of borrowing by the private sector. Recently, since the Cyprus rescue, the private sector’s disadvantage, particularly for small and medium-size enterprises (SMEs), increased to crisis proportions. Fortunately, the authorities recognize this. The European Central Bank is discussing the possibility of using its resources to help resolve this problem. And it is very, very important what they come up with. I am hopeful that they will produce a scheme that could make a difference. If you could package the loans to SMEs and refinance them at the ECB on equal terms, that would mean that enterprises south of the Alps would be able to borrow on more or less equal terms with enterprises north of the Alps. That would be a game-changer.
I am sure that this will be resisted on legal grounds. I am not in a position to follow the battle within the ECB from the outside, but what the outcome will have a major influence on the future course of events.
It should not escape your attention that if the ECB succeeded in making credit available on equal terms, it would effectively mean a large-scale mutualization of rather risky debts. Once that happened, it would make sense to mutualize government debts as well. Guarantees have a peculiar feature: the more comprehensive and convincing they are, the less likely they are to be invoked and to result in losses. So the securitization of SME loans could be an indirect route to Eurobonds. It would certainly be a step in that direction. That is why it is bound to be resisted. But success could lead to a positive resolution of the euro crisis.
QUESTION: Do you think Germany could ever accept the idea of debt mutualization by the ECB? I am sure that there must be severe resistance to this idea in some circles in Germany. Can they prevent it?
SOROS: The ECB is a functioning institution. So long as it acts within its powers, Germany is not in a position to veto it. This is why I am hopeful that something really significant might come out of the deliberations currently taking place behind closed doors.
QUESTION: Do you think the current economic crisis is possibly the final step in a general philosophical crisis in the West?
SOROS: I discussed this in 2000, in my book on The Crisis of Global Capitalism. So far, global capitalism is surviving, but with great difficulty. I hope it will continue to do so, but with less difficulty. I don’t think there is a viable alternative to global capitalism, but it does need better institutions.
QUESTION: Europe is still in deep recession. What are we doing wrong? What is it that we can learn from the United States to overcome the crisis?
SOROS: First of all, the euro crisis is a direct consequence of the financial crisis that started in the US in 2007. And it has to do with the design of the eurozone, which is fundamentally flawed. The global financial crisis revealed some of those flaws, though some are not properly recognized even today. So the US is, in fact, doing better. Europe now has to solve its own crisis, which is, of course, a combination of a financial crisis and a political crisis.
QUESTION: Some people have said that speculators such as yourself helped cause these crises to some extent. How do you react to this criticism?
SOROS: I am not surprised. And I am ready to answer any concrete criticisms that may be raised. I have always been very open about my activities. Financial crises are not caused by speculators, but by the authorities, which create or establish the wrong rules that allow speculators to do what people blame them for. In other words, to put it more clearly, speculators are messengers delivering bad news.
QUESTION: Looking back at what happened in 1992 with your Quantum Fund, which led to the devaluation of the Italian lira by 30%, what are you feelings today? Do you have any regrets?
SOROS: No, I have no regrets whatsoever. My actions have been discussed. At the time, I did take a position in the Italian lira, because I was listening to the Bundesbank talking about its unwillingness to provide funds to maintain the European exchange-rate mechanism – the ERM. So it was a good speculation. And I have no regrets whatsoever.