George Soros’ first prescription for solving the Euro crisis looks flawed.

He is certainly right in deploring the catastrophic social results of euro membership now playing out in Greece, Spain, Portugal and Italy (and soon to spread to France) but his remedy for the adoption of Eurobonds seems misguided.

Unless Mr. Soros is recommending that the indebted countries simply shed all liability for their debts and shift them onto the Eurozone (i.e. the unconditional, open-ended joint liability and sovereign financing which is presently prohibited), enabling the uncompetitive Euro members to swap their existing debt for Eurobonds will be entirely ineffective unless there is a simultaneous large fall in the value of the euro. Unless this occurred, the weight of the debts would be unchanged and would need to be borne somewhere. It would be no different from unlimited financing by the European Central Bank under its OMT program, except that the creditors would be individual investors rather than the central bank of the Eurozone.

The likely market result would be that the bond rates applied to individual countries would vary, as now, depending on the market’s judgments of each country’s prospects of returning to sustainable growth and financial stability. This would, in theory, give the periphery countries time to carry out ‘necessary reforms’ to their economies. However, as Mr. Soros notes, Eurobonds will not ensure recovery. With public debt already above or near the level of GDP in all the countries mentioned above, the likely result, if the interest rates they pay on the new Eurobonds exceed, as now, their growth rates, will simply be to propel them further towards the event-horizon of debt default (or towards the counterpart of this, ever-increasing bond rates). They would soon be in the same position as Greece today. (Mr. Soros’ faith in the ability of governments to stimulate economic growth is misguided. Japan over the last two decades, and the USA and the UK more recently, have demonstrated conclusively the impotence of traditional Keynesian measures in certain circumstances.)

However, his alternative remedy, that Germany leave the Eurozone, is much more realistic. The fact is that any durable solution to the crisis must enable the peripheral countries, which include for this purpose France, to return to sustainable positive growth. This will not happen while they share a currency with Germany. As Mr. Soros says this is no fault of Germany; her dominance of Europe is a simple geo-political fact which has been a permanent feature of the European scene for more than 150 years. Germany was able to benefit from having a weak euro as its currency during years while it adjusted to the absorption of East Germany; it is time to ‘renvoyer l’ascenseur’ and help the rest of the Eurozone to undertake their own adjustments.

Finally, Mr. Soros’ reverence for the ‘small group of far-sighted statesmen’ is deeply regrettable. These wise men and their followers (fighting, as senior politicians always do, the dangerously irrelevant battles of yesteryear) have led to the creation of a social, political, financial and economic catastrophe of huge proportions. So far from practising pragmatic ‘piecemeal social engineering’ they systematically ignored and suppressed any public accountability in their pursuit of creating the bureaucratic tyranny which the EU has become (the description, from more than a decade ago, is that of Larry Siedentop, then a lecturer in politics at Oxford, in his book ‘Democracy in Europe’). The result is as far from the European (and Popperian) democratic and libertarian ideals that inspired Mr. Soros, and many of us, as it is possible to be. The real tragedy is that the possibility of a sensible collaboration among the European nations (which would, realistically, grow slowly and incrementally over decades) will be set back a generation or more.

Giles Conway-Gordon

