Thursday, August 11, 2011

Soros on the Euro Crisis

Germany and the other eurozone members with AAA ratings will have to decide whether they are willing to risk their own credit to permit Spain and Italy to refinance their bonds at reasonable interest rates. Alternatively, Spain and Italy will be driven inexorably into bailout programs. In short, Germany and the other countries with AAA bond ratings must agree to a eurobond regime of one kind or another. Otherwise, the euro will break down.

It should be recognized that a disorderly default or exit from the eurozone, even by a small country like Greece, would precipitate a banking crisis comparable to the one that caused the Great Depression. It is no longer a question whether it is worthwhile to have a common currency. The euro exists, and its collapse would cause incalculable losses to the banking system. So the choice that Germany faces is more apparent than real – and it is a choice whose cost will rise the longer Germany delays making it.

1 comment:

Mitch Guthman said...

I agree with Soros on what must be done to extricate ourselves from this immediate crisis. It’s necessary for Germany and France to agree to some sort of eurobond regime to prevent a collapse. There is no choice and if Europe is to avoid total disaster, then Merkel and Sarkozy must step up and disregard domestic political considerations for the sake of Germany, France and Europe.

Yet, one must question not only whether the Euro can be sustained in the long run but also whether it should be sustained.

Both the EU and the Eurozone have expanded helter-skelter based on vague assurance and understands about “targets” and projections which have pretty consistently turned out to have absolutely no basis in reality. It’s now quite clear that Greece, for example, never was even remotely qualified to enter the Eurozone. Probably some of the Eastern European countries should not have been allowed into the EU let alone the Eurozone.

This pointless but relentless expansion of both the EU and the Euro is largely responsible for the current situation. The assurances we were given about the necessary economic strength of Euro members during the Maastricht and Lisbon debates have proven to be worthless.

The Euro was a great mistake. I believe when (or perhaps if) the current crises ends the Euro should be unwound and EU expansion should be halted.