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George Soros, Liberal Dreamer.

by r------ Thu Apr 12th, 2012 at 09:04:16 AM EST

I think we agree in varying measuresthat the EU and the Euro project both face existential challenges, with symptoms of those challenges being an increasingly acute financial crisis, a progressive deficit in democratic institutions among member states (with the EU effectively installing caretaker governments in, so far, two member states, Greece and Italy) as well as a persistent deficit in the putatively democratic institutions of the EU itself (whose parliament has been shown to be effectively irrelevant in confronting any of the major issues of the EU day).

In this, and especially as regards the first point, we are far from alone, with numerous commentators, though principally in the English-speaking world (accompanied by some on Europe's non-anglophone periphery, and in particular in Greece, where the crisis is most acutely felt), lamenting the rank inability of those insitutions which have the power to confront these challenges (principally among them the ECB, the European Commission and the dominant memberstate institutions behind these, notably the Bundesbank and the governments in Berlin and, to a lesser extent, Paris) to actually do anything other than fiddle and fudge, declaring victory as they negotiate yet another "historical" yet inconsequential (or, at least, far from up-to-the-task) accord, agreement or memorandum of understanding.

Today, George Soros, on the pages of the FT, adds his voice (paywall) ever more explicitly to the chorus, arguing that far from abating, the euro crisis is getting worse. The ECB may have provided temporary relief (in the form of 1tn€ free liquidity) to the sovereign credit crunch, stabilizing markets for the time being, a time which will not last long.

Why? Because the fundamental problems have not been solved; the BOP issues between debtor and creditor member states have worsened and will not improve without action. He therefore argues "the crisis has entered what may be a less volatile but more lethal phase."


Less volatile in the sense that formal public financial instutions in the EU appear to have stabilized a deteriorating situation, though that stability is likely to enter a period of and equally stable, secular decline rather than, as at present, treading water. But lethal in two senses: lethal to the viablity of the EU and the Eurozone projects in an instutional sense, and lethal in the very actual sense, as the liquidationist logic applied from core to periphery, via a degrading social and public health perspective, begins to result in increasing rates of mortality (as was observed two decades ago in the states of the former Soviet Union as in parts of Eastern and Central Europe).

Mr Soros is quite pessimistic, and rightfully so, but he does propose a few solutions to the issues at hand, all the while insisting on the ultimate irrelevance of the Bundesbank (and by extension, the ECB) in matters which are essentially political (and in so doing, Mr Soros arguably puts into question, and thankfully so, that ridiculous notion of "central bank independence".

Many of these solutions are akin to what you have been reading on this blog over the past three years, with a twist here or there. Guarantee of a uniform interest rate for all member-state official debt, importance of measuring private as well as public debt levels and takign proper account for these, necessity of increased German domestic demand, separation of public investments from public expenditures in the determination of public deficit levels, and so forth. All, very reasonable, all very logical proposals from a purely liberal perspective, with the added merit that they might actually work.

But one item caught my eye, which betrays the liberal optimism of even such a sobre and jaded market observer as Mr Soros, who while arguing for such extraordinary measures, cites the EU's fiscal charter, which requires member states with public debt in excess of 60% of GDP to reduce this debt load by 5% annually. He intimates this as a stick, to which he would add a carrot (and thereby, ostensibly, further avoid the member state moral hasard issue of constantly allowing breaches of the pact without consequence), naely, that good behaviour be rewarded (no discussion of what form of reward this would involve in the present article). He declares that such a reward would in and of itself head off the deflationary death spiral towards which we inarguably are heading, thereby improving prospects.

I argue that the exact opposite would happen for, as has been stated here and elsewhere often and by many, this crisis is above all a crisis of demand. "Rewarding good behaviour" in Soros-speak is an incentive to spending retrenchment on the part of EU member states at precisely the time this is most counterproductive, itself contributing to the deflationary feed-back loop into which the Eurozone has arguably already entered.

And not only is such spending retrenchment, which Mr Soros aims to incentivize, counterproductive, it almost necessarily will involve further cuts to European solidarity mechanisms, equally counterproductive. In this way, Mr Soros also neglects the political situation on the ground in most EU member states at present: out of touch elites, essentially unaccountable to the people on whose behalf they putatively govern, and who no doubt will be very happy to respond to incentives of the sort to which Mr Soros points, if only to use those incentives to reward their friends in a private sector which, as recent privitisation developments in the UK and earlier ones elsewhere underline, have increasingly merged with the State (and expressions of State interest) over the past few decades of neo-liberal regression and so-called "third-wayism," the resulting lack of alternance (expressed on these pages recently as "TINA") only sealing the deal.

I am sure Mr Soros means well, but the open society he beckons for is no longer, strictly speaking, open. The EU has bifurcated into its local elites and the people who tolerate their rule with increasing impatience. There will be no use of Mr Soros' carrot on behalf of the people, any more than present uses of the stick have taken account of the needs of those people to date. Strictly speaking, Mr. Soros is, as is often the case in that ideological sphere, that of liberalism, an unreasonable idealist.

in favor of paraphrasing, in deference to FT policy.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Thu Apr 12th, 2012 at 09:44:53 AM EST
Somehow I wound up on a GerogeSoros.com email list and got his FT column by email today... I found the following argument towards the end very interesting:
Most important, some new, extraordinary measures are needed to return conditions to normal. The EU's fiscal charter compels member states to reduce their public debt annually by one-twentieth of the amount by which they exceed 60 per cent of gross domestic product. I propose that member states jointly reward good behaviour by taking over that obligation. They have transferred to the ECB their seignorage rights, valued at €2tn-€3tn by Willem Buiter of Citibank and Huw Pill of Goldman Sachs, working independently. A special-purpose vehicle owning the rights could use the ECB to finance the cost of acquiring the bonds without violating Article 123 of the Lisbon treaty.
Attached to that email there was the text of "a related speech he gave in Berlin on the occasion of the publication of his latest book in German". (Also here in full)
The euro crisis is particularly instructive in this regard. It shows that policies that could have worked at one point of time are no longer sufficient at the next one. It also demonstrates the role of imperfect understanding and misconceptions in shaping the course of history. Since the euro crisis is currently exerting an overwhelming influence on the global economy I shall devote the rest of my talk to it. I must start with a warning: the discussion will take us beyond the confines of economic theory into politics and social philosophy. It will provide an excellent illustration of the reflexive interaction between imperfect markets and imperfect regulators. That is an interaction that goes on all the time while bubbles occur only infrequently. This is a rare occasion when the interaction exerts such a large influence that it casts its shadow on the global economy. How could this happen? 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 lead me to the conclusion that the euro crisis threatens to destroy the European Union. Let me explain.


The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.


The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.


The Maastricht Treaty also assumed that only the public sector is capable of producing unacceptable imbalances; the market was expected to correct its own excesses. And the Maastricht Treaty was supposed to have established adequate safeguards against public sector imbalances. Consequently, when the European Central Bank started operated it treated government bonds as riskless assets that banks could hold without allocating any capital reserves against them. This encouraged commercial banks to accumulate the bonds of the weaker countries in order to earn a few extra basis points. This caused interest rates to converge which, contrary to expectations, led to divergences in economic performance. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed a housing boom that made them less competitive. Yet others had to bail out their banks after the crash of 2008. This created conditions that were far removed from those prescribed by the Maastricht Treaty with totally unexpected consequences. Government bonds which had been considered riskless turned out to carry significant credit risks.


Usually [buying time] works. Financial panics subside and the authorities realize a profit on their intervention. But not this time because the financial problems were reinforced by a process of political and social disintegration. While the European Union was being created, the leadership was in the forefront of further integration; but after the outbreak of the financial crisis the authorities became wedded to preserving the status quo. This has forced all those who consider the status quo unsustainable or intolerable into an anti-European posture. That is the political dynamic that makes the disintegration of the European Union just as self-reinforcing as its creation has been.


Whether or not the euro endures, Europe is facing a long period of economic stagnation or worse. Other countries have gone through similar experiences. Latin American countries suffered a lost decade after 1982, and Japan has been stagnating for a quarter-century; both have survived. 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.

This is a dismal prospect. There must be a way to avoid it - after all, history is not predetermined. Right now Europe hangs together out of grim necessity. That is not conducive to a harmonious partnership. The European Union had been a "fantastic object", a desirable goal, when it was only an idea, but it turned into an objectionable imposition when it became a reality. The only way to reverse this seemingly inexorable fate is to recreate the European Union as a fantastic object worth striving for. The European Union has the makings of an open society that could be a model for the rest of the world. All it needs to do is to recommit itself to the principles of open society and that requires the authorities to recognize their mistakes and correct them. Angela Merkel has shown some signs of doing so but the German authorities, notably the Bundesbank and the constitutional court are dead set on enforcing laws that have proved to be unworkable. This has turned statutes that were meant to be stepping stones into immovable rocks that stand in the way of finding a solution. I believe a solution can be found even at this late stage but it will require a change of heart by the German public.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Apr 12th, 2012 at 09:47:38 AM EST
That was indeed a very good point he made, citing Buiter and Pill, and as I think you and I agree, some substantial mutualisation of debt obligations is required to head off the present impasse.

Noting also that implicit in this argument, as well as the one he makes about distinguishing between state investment spending and other forms of state participation in the economy, another good idea (which, despite the fact that US states are commonly refered to as needing to balance their budgets - yes, but that balancing is considered outside of such outlays as considered for investment purposes...i.e., this is a very American idea) is that growth is necessary for realisation of his ultimate open society aim.

This in and of itself I do not happen to agree with, though it is often (though not necessarily always) an important component in that realisation.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu Apr 12th, 2012 at 09:55:33 AM EST
[ Parent ]
€2-3 trillion in noninflationary seigniorage is 15% to 30% of GDP. To be compared with the Maastricht-compliant 60% debt limit.

Of course, there are a lot of assumptions hidden in the phrase "noninflationary seigniorage"...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Apr 12th, 2012 at 12:48:38 PM EST
[ Parent ]
contains a separate "Capital Budget". There are various funding sources and various dispositions of the funds; but, increasingly in my estimation, these funds are becoming revolving loans. Very Chris Cookish - and I note that there is a fairly bipartisan acceptance of this approach.

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Thu Apr 12th, 2012 at 06:52:30 PM EST
[ Parent ]

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