In 1992 George Soros, an iconic global financier, took a bet on the British pound. The outcome is now part of economic folklore and added to the aura of Soros. Now, 20 years later, Soros is making another startling claim. Addressing the opening seminar organized by the Institute for New Economic Thinking (INET) in Berlin, he said, “The euro has effectively broken down."

According to him the infusion of more than €1 trillion into the euro zone banking system has only alleviated the pressure not resolved the fundamental problems. Soros believes that the powers that may be in the euro zone are living in denial of the reality; failure to address it, he argues, could lead to the break-up of the euro zone.

“My explanation is that there is a bubble involved, but it is not a financial but a political one. It relates to the political evolution of the European Union and it has led me to the conclusion that the euro crisis threatens to destroy the European Union," he added.

At the core of the criticism is the fact that there has been a failure to recognize the problem, and hence, the diagnosis is not in line with what is desired. An unravelling of Europe has huge implications not only for the US but also for the rest of the world—particularly India, which is already in the throes of a self-inflicted crisis. Just recall the global upheaval of 2008.

The Soros assessment is that the euro authorities are persisting with status quo, while what is needed is some serious “out of the box" thinking. And the key, says Soros, is Germany—the China of Europe. Due to a host of circumstances, Germany acquired a competitive advantage compared with other countries in the euro zone. So when the crisis started to unravel, there was a flight of capital to Germany, forcing a balance of payment crisis on top of a banking crisis on member countries. What has accentuated the problem is that Germany has begun to tighten domestic demand by pursuing a costlier credit policy, while, as Soros argued, the obverse is required—Germany needs to step up its demand and thereby help heavily indebted countries shore up their position by meeting this demand.

At the least, Soros believes that if “status quo" in policy persists, then Europe is looking at prolonged period of stagnation, something akin to what countries in Latin America underwent in the 1980s and Japan is undergoing for the last quarter of a century. “But the European Union is not a country, and it is unlikely to survive. The deflationary debt trap is threatening to destroy a still-incomplete political union."

Interestingly, Joseph Stiglitz, Nobel laureate, former chief economist of the World Bank and a participant at the INET conclave, like Soros, too, believes the euro zone is facing an imminent crisis. Speaking on the sidelines, Stiglitz said, “The policy of austerity adopted by Europe (nudged by Germany) is a recipe for disaster."

According to him, the logic of the circumstance requires a counter-cyclical policy, but does not see any consensus emerging on it at the Fund-Bank meetings. He was, however, hopeful that the growing political and social unrest was forcing governments to rethink their position and actual ease up on the ordained fiscal compression. Pointing out that IMF has already argued that surplus countries (read China and Germany) have to create additional demand, Stiglitz maintained that eventually policy planners will come around to this point of view.

But the big question is that will it have been too late by then and would the grim prophecy of Soros hold true? In September there was a similar situation when the crisis was considered imminent. However, Europe has stumbled, but survived for another six months. But is it wise to respond after the event or react ex ante? Presumably these are the questions that will dominate the meetings as opposed to the farcical election of another US nominee (without prejudice the candidate’s competence) as the new head of the World Bank overlooking the claims that should have been exercised by the BRICS nations—Brazil, Russia, India, China and South Africa.

Anil Padmanabhan was a guest of INET. He is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com

Also Read | Anil Padmanabhan’s earlier columns

Close