Billionaire investor George Soros said that German-driven austerity plans in Europe risk creating tensions that could splinter the region as it struggles with a debt crisis entering its third year.
“Germany is acting as a task master, imposing fiscal discipline,” Soros told reporters at the World Economic Forum in Davos, Switzerland today. “But that could create tensions that could destroy the European Union.”
Investors have become less upbeat about the euro region, according to a Bloomberg Global Poll today. For the first time, a majority -- 56 percent -- say one or more nations will leave the single currency in the next 12 months. Meanwhile, Greece is trying to complete a deal with private bondholders on a debt- relief plan before a summit of European leaders on Jan. 30.
“Greece may pose a problem if it in fact defaults,” Soros said. “Defaulting by itself doesn’t necessarily mean they will leave the euro. But the need to at least reach a primary surplus may force Greece out of the euro.”
Soros also said there is a “big difference between Greece and Italy,” with the latter doing “really quite well.”
As Italian Prime Minister Mario Monti has stated, “there needs to be some reward,” Soros said. “There need to be some benefits for Italy and that would strengthen the Monti government.”
Monti has pushed through a 30 billion-euro ($39 billion) austerity plan and a package designed to boost growth in the past two months. Italian borrowing costs have fallen since he came to power in November, and he said this week his measures have been “appreciated” by European colleagues.
“You must impose strict fiscal discipline on deficit countries, but then you must find some stimulus to get out of the deflationary spiral,” Soros said. “Structural reforms alone won’t do it.”
He said eurobonds will be needed to provide additional economic support and that while measures by the European Central Bank “relieved the liquidity problems of European banks,” they “didn’t cure the financing disadvantages highly indebted countries suffer.”
“Stimulus has to come from the EU,” Soros said. “This will require eurobonds one way or the other.”
“Half a solution isn’t enough,” he said.
Soros is right, half a solution isn't enough. I completely agree with him that eurozone will require eurobonds if they are to tackle this debt crisis in a meaningful way.
Eric Pfanner of the NYT's DealBook reports, Soros Promotes Crisis Plan for Europe:
The billionaire investor George Soros said on Wednesday that it was possible Greece could be pushed out of the euro zone this year.
“The odds, let’s say, are in that direction,” Mr. Soros said in a speech at the World Economic Forum in Davos. Instead of working to keep the country as a member of the single currency, he added, European policy makers ought to focus on saving the rest of the euro bloc.
Recent action by the European Central Bank, which in December moved to provide large amounts of liquidity to the region’s banks, have calmed the financial markets for now, he acknowledged. But he said these measures would not be enough to solve the festering sovereign debt problems that have driven up the borrowing costs of weaker euro zone countries. Spain and Italy, he said, remain “dangerously exposed.’’
“It leaves the weaker members of the euro zone relegated to the status of third world countries that became highly indebted in a foreign currency,” he said. “Germany is acting as the task master imposing tough fiscal discipline. This will generate both economic and political tensions that could destroy the European Union.”
Mr. Soros used the occasion to promote an alternative plan to deal with the euro crisis, as outlined in his new book, “Financial Turmoil in Europe and the United States.”
Under his proposal, the European Central Bank and others, including the European Financial Stability Fund, would act in concert as “lenders of last resort” to governments, a role that the central bank has steadfastly disavowed. Mr. Soros says this would allow Italy and Spain to issue treasury bills at around 1 percent.
The European economy will also need stimulus to get moving again, Mr. Soros said, adding that the cost would have to be shouldered collectively. As such, it will require the issuance of so-called euro bonds under which the debt of euro zone members would be pooled “in one guise or other.”
If nothing more is done, and if policy makers continue to mostly pursue austerity measures, the euro zone will fall into a debt-deflation spiral, he said. That, in turn, could prompt widespread social disorder, he added.
“What is happening in Hungary today,’’ Mr. Soros said, “is a precursor of what is in store.”
And Soros painted an equally bleak picture for America, predicting riots, police state and class war:
I am not here to cheer you up. The situation is about as serious and difficult as I’ve experienced in my career,” Soros tells Newsweek. “We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”
Soros goes on to compare the current state of the western world with what the Soviet Union was facing as communism crumbled. Although he would think that history would have taught the globe a thing or two about noticing trends, Soros says that, despite past events providing a perfect example of what is to come, the end of an empire seems imminent.
“The collapse of the Soviet system was a pretty extraordinary event, and we are currently experiencing something similar in the developed world, without fully realizing what’s happening,” adds Soros.
Soros goes on to say that as the crisis in the Eurozone only worsens, the American financial system will continue to be hit hard. On the way to a full-blown collapse, he cautions, Americans should expect society to alter accordingly. Riots will hit the streets, says Soros, and as a result, “It will be an excuse for cracking down and using strong-arm tactics to maintain law and order, which, carried to an extreme, could bring about a repressive political system, a society where individual liberty is much more constrained, which would be a break with the tradition of the United States.”
The recent adoption of the National Defense Authorization Act for Fiscal Year 2012 and the proposed Enemy Expatriation Act, if approved, have already very well paved the way for such a society. Under the NDAA, the US government is allowed to indefinitely detain and torture American citizens suspected of terror crimes without ever bringing them to trial. Should lawmakers Joe Lieberman (I-CT) and Charles Dent (R-PA) get their Enemy Expatriation Act through Congress, the US will also be able to simply revoke citizenship without trial, essentially removing constitutional rights from anyone deemed a threat.
Others have cautioned that, as inequality becomes more rampant in America, the country’s citizens are becoming increasingly agitated with those on the other side of the extreme. In a recent survey released by the Pew Research Center, 66 percent of the adults studied believe that either “very strong” or “strong” conflicts exist between America’s elite and the impoverished, a statistic that has skyrocketed in recent years. Between 2009 and 20011, the proportion of those that sense conflicts exist as such between the class groups grew by 19 percentage points. While less than half of Americans fearing a fight brewing at the dawn of the Obama administration, today two-out-of-three Americans feel that there is a strong conflict between both extremes of society.
Addressing the issue of inequality, Soros tells Newsweek that the main issue that will make or break a reelection for US President Barack Obama will be whether or not the rich end up being taxed more. Among the current frontrunners in the Republic Party’s race for the GOP nomination, wealth and taxes have been of the biggest concern of party rivals. The top candidates have made millions off of investments, and at a time of immense inequality, represent what 99 percent of Americans don’t. Taxing the rich to a bigger degree might finally bring a chance, and Soros says, “It shouldn’t be a difficult argument for Obama to make.”
Soros adds that if the US manages to make it through the troubled times to come, it come allow the nation to enter another golden era. “In the crisis period, the impossible becomes possible. The European Union could regain its luster. I’m hopeful that the United States, as a political entity, will pass a very severe test and actually strengthen the institution,” he tells Newsweek.
With almost seven percent of Americans living below half of the poverty line, four unemployed Americans for each job, a shrinking middle class and an increasingly overzealous police state, it could very well be a tough road to get there, though.
Perhaps this is why Soros agrees with the President Obama that the richest Americans should pay more in taxes. "I'm a rarity in the hedge fund community," he said.
He is indeed a rarity in the hedge fund community and EU leaders would be wise to listen carefully to what Soros is saying about tackling the debt crisis. Below, Soros addresses the World Economic Forum (h/t, Guardian). I also embedded this CNBC interview.