Why the European Union is doomed in its current form anyway (says George Soros)


3:41 pm - June 4th 2012

by Sunny Hundal    


      Share on Tumblr

Last night the Americans on my Twitter feed were buzzing about a speech by the billionaire financier George Soros. So I decided to read it, and it is extraordinary indeed.

Soros isn’t just a very astute investor but one of those rare people able to take a long view of economic events and explain it well. His main point is that Germany has three months to save the Euro, and it has to do so whole-heartedly not just with the minimum requirements.

But the point I want to focus on is how the European Union project is finished in its current form. And this has huge implications for the UK.

There are only two possible scenarios coming out of this crisis: the Euro breaks up or the Euro survives for everyone currently using it.

George Soros thinks the Euro will survive. Not just because the financial consequences for all Eurozone countries will be horrific, but mostly because Germany will be one of the biggest losers in that unravelling.

As mentioned before, the gradual reordering of the financial system along national lines could make an orderly breakup of the euro possible in a few years’ time and, if it were not for the social and political dynamics, one could imagine a common market without a common currency. But the trends are clearly non-linear and an earlier breakup is bound to be disorderly. It would almost certainly lead to a collapse of the Schengen Treaty, the common market, and the European Union itself. (It should be remembered that there is an exit mechanism for the European Union but not for the euro.) Unenforceable claims and unsettled grievances would leave Europe worse off than it was at the outset when the project of a united Europe was conceived.

But the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany. It would leave Germany with large unenforceable claims against the periphery countries. The Bundesbank alone will have over a trillion euros of claims arising out of Target2 by the end of this year, in addition to all the intergovernmental obligations. And a return to the Deutschemark would likely price Germany out of its export markets – not to mention the political consequences. So Germany is likely to do what is necessary to preserve the euro – but nothing more.

That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments. That would turn the European Union into something very different from what it was when it was a “fantastic object” that fired peoples imagination. It would be a German empire with the periphery as the hinterland.

The third paragraph above illustrates why Soros thinks the Eurozone needs fundamental reform to survive.

What kind of reforms? He goes over them briefly in the speech:

Banks need a European deposit insurance scheme in order to stem the capital flight. They also need direct financing by the European Stability Mechanism (ESM) which has to go hand-in-hand with eurozone-wide supervision and regulation. The heavily indebted countries need relief on their financing costs. There are various ways to provide it but they all need the active support of the Bundesbank and the German government.

His main point in the speech is that the Euro can only survive through closer political and economic integration.

There is no other way unless you want a permanently destabilised Euro open to speculative attacks from the financial markets. I think that makes perfect sense.

But Soros’s speech is also a warning shot to those who think the Euro could be broken up without too much pain. Global finances have been re-ordering along national lines, he says, but they haven’t gone far enough. Any break up would be highly disorderly and highly disruptive. In short, all Europeans have no choice but to ensure the Euro stays.

But a highly integrated (politically and economically) Eurozone means the European Union will become outdated and will have to be re-drawn and re-imagined.

We can either pretend things will remain the same (as many Europhiles hope), or we can stand on the sidelines and be excluded entirely (as Eurosceptics want), or we can lead the way in reshaping what that relationship looks like through a referendum (my preference).

    Share on Tumblr   submit to reddit  


About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
· Other posts by


Story Filed Under: Blog ,Economy ,Europe ,Foreign affairs

Sorry, the comment form is closed at this time.


Reader comments


1. Dick the Prick

[deleted]

2. Frances_coppola

Soros, like most people, is completely wrong about Target2. The Bundesbank’s “claim” is simply an accounting representation of the money received by the German private sector either as payment for exports or as repatriation of funds (the latter is currently the more significant) and coming to rest in German commercial bank accounts. The Bundesbank’s “claim” is not against periphery countries or even against the ECB. It is against its own commercial banks. The remedy for the imbalance is for German banks to reduce their borrowings from the Bundesbank. If periphery countries actually “settled” this imbalance they would be paying twice for the same goods or doubling the quantity of German savings leaving the country.

I totally agree that disorderly breakup of the Eurozone would be an unprecedented disaster. I am not totally convinced that a planned and managed breakup would be that disastrous. But as planning and managing a breakup requires a) admission that there is a problem b) the political will to do something about it, it is about as likely as the alternative which is, as Soros says, much closer integration. The Eurozone is heading at full tilt for a brick wall. At present it shows no signs of turning.

not being part of an unproductive, demographic black hole, top down corporatist, psudo empire is just the ticket. Sidelines please get me away from these bad bastards asap.

“Soros is the problem and he can pucker up and kiss my sweet arse before the guy earns anything else but disdain.”

Yea Soros is the problem, he makes money from a situation he understands, so you be a big boy and send your “bad feelings” to Mr Soros, while a bunch of politicians who do not understand economics or the situation they have created continue to fuck up your life.

I dont even feel sorry for the masses any more, your screwed of your own accord.

5. Limiting Factor

All the above plans are ultimately futile, since they will leave the fundamental cause of the problem – the interwoven systems of finance, AKA the greedocracy – untouched. Banks should be taken back into national ownership, investment insitutions, speculators and hedge fund corporations must now be regulated to the hilt, now and ruthlessly. There’s nothing wrong with making money on this or that market – but there is plenty wrong with plotting and scheming to screw over entire nations just to make a faster easier buck. Epater les aristos!

“His main point in the speech is that the Euro can only survive through closer political and economic integration.”

The problem is that if this is pursued without the consent of the people of the integrating countries things could get messy.

7. Dick the Prick

@4 – bit harsh. When people blame the banks it seems like a nebulous entity sometimes without an understanding of the PAYE and employment levels these institutions cater for. Whereas Hedgies gambling massively on the fall of a nation’s currency in amounts even 10 years ago would have had them laughing their socks off hardly sounds like ‘understanding’ economics, rather buying the market in stupidity. Soros is actively funding Democratic Super Pacs for reasons we don’t understand as yet but i’m dam sure he ain’t losing a dime. Fuck him. Either be rich or be a politician – can’t be both. This guy whould learn the value of shutting the fuck up and stop ripping people off or get elected. Otherwise, if it quacks like a fuck it’s a fuck.

8. Richard W

To sum up what Mr Soros is actually saying.

For the EZ to survive the constituent parts must become like a nation state with all the institutional mechanisms that make nation states work. Well blow me down, it is almost like he is saying a monetary union can’t work without political union. News only to those who have been deaf for the last twenty years.

The obvious difficulty with things like direct financing from ESM, which is just a polite way of saying a common eurobond is it would breach the German constitution. However, the technical difficulties of forging a nation state from the EZ are all solvable if there was a will. Leaving aside all the difficuties of optimum currecy areas and divergent productivity. The political hurdles run into some quite fundamental problems. For nation states to work requires the constituent parts to want to be part of a nation state. Do the current populations of EZ members look like they want to be part of the same nation state with common standards applying to all. Not to my eyes. I am in Canada at the moment and spend quite a bit of time here. Most of Canada society does not look a whole lot different from US society to me. Yet, there is almost zero desire for Canada to become the same nation state as the US. One can’t force populations in directions that they do not want to go without serious reactions. EZ members are miles away from being one people.

Common financing means eventually common standards. For example, one can’t have financing from the same pot and different retirement ages throughout the EZ. Just imagine the impossibilty of people being able to retire at a different age in Birmingham compared to Manchester. Standard tax rates throughout the EZ would also be inevitable. European deposit insurance to prevent capital flight is just not going to happen without Germany being in charge and calling the shots. Whatever way you look at resolutions Germany will be in charge telling the others what they will be doing. The problems of the EZ are technically solvable. However, the political difficulties are too great in my opinion.

The euro will survive but all the current members will not survive as members of the monetary union. No amount of wishful thinking will change that reality.

9. Dissident

who precisely would profit the most?
or would the erozone benefit the rich at everyone else’s expense, like all neoliberal bull. be nice to know, so i could prepare, lots of landfill sites I could survive on, thirdworld style! question is, which one…

The problem is that if this is pursued without the consent of the people of the integrating countries things could get messy.

If the question is – do you want out of the Euro or in, then I don’t see consent being an actual problem.

“Whereas Hedgies gambling massively on the fall of a nation’s currency in amounts even 10 years ago would have had them laughing their socks off hardly sounds like ‘understanding’ economics, rather buying the market in stupidity. ”

With all due respect what do you know? Do you run a fund and what is your track record? Who was operating from a sound economic understanding on black Wednesday and who was buying the market in stupidity?

I will be honest, I do not like Soros and I don’t view him as some god who can not be wrong, however when some one of his standing speaks its wise to listen, to cast aside what he says on the basis of ” these kind of people benefit from failure” is lunacy.

Of course he benefits from the systems failure, he will benefit from its working success to because he understands how it works and how to benefit from it.

The politicians do not understand, then they make a mess and instead of addressing there mess with some sense, they attack those who do understand and whose job it is to profit from any market condition,as though its there fault to start with.

@5 Points out the problem – Soros isn’t suggesting fixing finance, or how money is created, which just means that he is just putting forward a policy that won’t fix the crisis, but instead move it around. Professor David Harvey explains this concept in this video:http://www.youtube.com/watch?v=qOP2V_np2c0
Here is Soros policy suggestion from the speech:
“Banks need a European deposit insurance scheme in order to stem the capital flight. They also need direct financing by the European Stability Mechanism (ESM) which has to go hand-in-hand with eurozone-wide supervision and regulation. The heavily indebted countries need relief on their financing costs. There are various ways to provide it but they all need the active support of the Bundesbank and the German government.”

So the problem is because of the fractional reserve banking system meaning that banks don’t have enough reserves, and because they have been recklessly leveraging beyond the legal reserve requirements for the past 20 years through the creation of private money, Soros suggests that the EU insure all bank deposits, effectively meaning that we will *always* bail out the banks and no savers make a loss (just the tax payers). This policy will work, but only *until* the EU itself in bankrupt.

We need to fix the root cause of the debt crisis, not just fiddle at the margins. We need to move to debt-free money, away from fractional reserve banking and to full reserve banking if we want to get out of this crisis for good.

You can watch a 1 hr documentary about this problem http://www.youtube.com/watch?v=d3mfkD6Ky5o&feature=plcp or read Positive Money’s UK draft bill to fix the problem http://www.positivemoney.org.uk/

I’d be happy to write an article about this solution to the crisis.

13. Frances_coppola

10 Sunny

The problem as I see it is that most of the people in the periphery countries DO want to remain in the Euro – but on their terms, not Germany’s. Similarly, most of the people in Germany DO want the periphery countries to remain in the Euro – but on German terms, not their own terms. They cannot all have their wish.

14. Dick the Prick

@11 – we’ve all gotta do degrees in something, for me – it was daaance. George Soros? Really? What’s he up to? Same as bloody usual, being a twat.

15. Ray Finch

The fourth choice, which is the one that those of us who have long predicted this catastrophe put forward, is to let the individual nation states regain their independence and, through a genuine free trade agreement, help them to regain their true financial equilibrium. Let us lose the nightmare of the anti-democratic EU and replace it with free nation states trading equitably whilst retaining their own fiscal and political independence and the right to vote out rulers they no longer support.

16. So Much For Subtlety

8. Richard W

To sum up what Mr Soros is actually saying.

For the EZ to survive the constituent parts must become like a nation state with all the institutional mechanisms that make nation states work. Well blow me down, it is almost like he is saying a monetary union can’t work without political union. News only to those who have been deaf for the last twenty years.

I am not sure he is right if he is saying this. You can have a monetary union without a political union. Ireland used the British pound for decades after independence. Hong Kong continues to peg their dollar to the American dollar and China has followed them. What you need is enough flexibility in interest rates to preserve the peg.

However even if Europe had a political union, the problem will still remain – the Germans want the Euro to be like the Deutschmark, the Greeks want it to be like the Drachma (or rather they want to run their own internal policies as if it was the Drachma while the Germans provide all the benefits of the Deutschmark). One or other of those two countries has to change. Political Union can only work if there is a convergence of economic policies. The Greeks need to retire later and work harder. Or the Germans need to learn to love inflation. The political union has to be thorough-going – right down to the level of workers’ rights and pay – or it won’t work at all.

Common financing means eventually common standards. For example, one can’t have financing from the same pot and different retirement ages throughout the EZ. Just imagine the impossibilty of people being able to retire at a different age in Birmingham compared to Manchester.

I have no problems imagining that at all. It depends on what sort of state you want. America could, and does, work with a loose federalism. There is no reason why Europe could not, at least in theory. However in practice I tend to agree with you.

The euro will survive but all the current members will not survive as members of the monetary union. No amount of wishful thinking will change that reality.

I don’t see the Euro surviving. The more that Europe fights for this, the less likely it will be like the Great Depression and the more likely it is it will be like the end of the USSR. The more they struggle to save the currency, the more of Europe they will wreck.

17. David Ellis

Portugal gave £6 billion to their banks today, last week Spain gave £40 billion and the week before Greece gave £18 billion. These are bankrupt states and countries where the people are suffering wage, welfare and job cuts on an unprecedented scale. Britain has so far handed over £345 billion of QE money to their banks to pay out on their toxic bonds. The general population pays for this with austerity and inflation. The hold a further and laughable £6.4 trillion of toxic bonds which is why they went bankrupt and which is why we are now going bankrupt: because we are propping them up. As long as the nations of the European Union continue to bail out the private banking sector then we have only decay and disintegration to look forward to.

The first task is to end this bail out. Let the bankrupt private banking system that gave us the thirty-year global credit bubble come Ponzi Scheme go bankrupt. Establish state-owned People’s Banks lending Euros or Pounds at base rate to small business and facilitating social investment from a central bank supplying money in accordance within a strictly agreed inflationary target range. Defend public spending but balance the budget by paying for it by collecting the necessary taxation. Next reduce the burden on the state by sharing the available productive work for a regime of full employment and finally renegotiate the founding treaties of the EU in accordance with socialist principles.

Ah right, no mention of the incompetent greedy politicians who lent all that money from the banks in some one else’s name, just break down a system you can no longer rape, give those who messed it up all the power and be a socialist, that’s how you solve all the worlds problems. Gotcha.

19. So Much For Subtlety

17. David Ellis

The first task is to end this bail out. Let the bankrupt private banking system that gave us the thirty-year global credit bubble come Ponzi Scheme go bankrupt. Establish state-owned People’s Banks lending Euros or Pounds at base rate to small business and facilitating social investment from a central bank supplying money in accordance within a strictly agreed inflationary target range.

You do realise that it is precisely these People’s Banks that have f**ked up don’t you? Britain may not have many but Spain surely does.

http://en.wikipedia.org/wiki/Savings_bank_(Spain)

The context of the first of the episodes of regulatory change for the savings banks was characterised by the intensification of regulatory burdens and marked by the overwhelming majority of new savings banks that were established between 1939 and 1977, being set up by local and central governments (with some notable exceptions like the co-operativist Caja Laboral).

Bankia is a merger of seven of these municipally owned banks. You did know this right?

So does Germany by the way.

http://en.wikipedia.org/wiki/Landesbank

So far the incompetence of these German State banks in this crisis has cost the German tax payers more than the British banks have cost the British tax payer.

The problem with Europe is too much socialism. Not too little. You can fight the market, but as Europe is proving, the market will win.

20. Anthony Zacharzewski

How would we “lead the way” with a referendum? Would we have a referendum on the Government’s negotiating stance? On the sort of Europe we’d like to see? Given how many options there are, the ballot paper would be a metre long. And then what if we voted for something that turned out not to be on the table? Have another. It’s a completely non-credible argument, sorry.

Sure, have a referendum, but once the pattern of what is happening has settled, and don’t give us the false choice of “grumpy status quo or out”, give us a real choice of “properly in or properly out”.

21. Mark Redwood

Krugman on newsnight put the Euro problem succinctly,

“something impossible is going to happen”

either

1) The euro is allowed to collapse, which is impossible

or

2) Germany accepts lost of debt relief, plus inflation, plus lots of open-ended lending, which is impossible.

http://www.youtube.com/watch?v=x6sYTEmHKAE

segment at 26:16

22. David Ellis

Absolutely no referendum on in or out of the EU. The labour party must present a policy to be voted on in a general election. Referendums are for demagogues and tyrants who via a yes or no answer hope to hold a gun to the heads of the people. Labour must stand for the renegotiation of the founding treaties of the EU in accordance with socialist principles as opposed to the neo-liberal monopoly capitalist charter we have at the moment.

As for the Euro of course it must be saved but the only thing that can save it is socialist measures such as: end the bail out of the private banking sector, state-owned People’s banks with a monopoly of credit in each member nation lending Euros at base rate and facilitating social investment etc.

Merkel is becoming the villain of the piece. Her unwillingness to accept Germany’s role in this crisis and bite the bullet is now a source of instability. By the same style of argument that Greeks have been feckless one might argue that Germans have done rather well out of running a trade surplus and now might have to forego all those agreeable second homes in southern Europe it enabled them to buy.

If the markets are volatile because of vague impressions and panic then something must be done in the short term to stabilise them. A full Euro-bond seems to be the best thing so far suggested. Then we need to look at how a political solution can be achieved, wedded with an economic solution that protects us from these disastrous instabilities. If it managed to be more equitable it would be even nicer.

“. Referendums are for demagogues and tyrants”

And that old thing called Democracy…my skin crawls at the scum.

25. Frances_coppola

17 David Ellis

You do know, I suppose, that the banks in Spain that are insolvent or nearly so are the regional savings banks or “cajas”, the majority of which are under public control and doing exactly what you suggest – lending money to local businesses at political instigation? That’s how they’ve gone bust.

26. Richard W

@ 16. So Much For Subtlety

SMFS, a currency peg is quite different from a monetary union. If a country pegs their currency to the currency of another nation they do import the monetary policy of the other country. However, the peg is not usually fixed but operates within a trading band allowing some flexibilty. Moreover, if the peg is set too low the country operating with an undervalued currency will experience price and wage inflation which eventually erodes the advantage of an undervalued currency as the real effective exchange rate (REER) appreciates. Every currency peg eventually leads to a crisis if a fixed rate is attempted.

The EZ members are in a monetary union which has led to a balance of payments crisis as capital from other parts of the monetary union flowed into the periphery from the core until it self-evidently stopped. What happens in a currency peg is the central bank accumulates reserves of the currency that they are pegged to- actually the government bonds of that nation. That is why China have huge USD reserves. The central bank always offers the best bid so they buy up all the inflowing dollars in exchange for local currency. However, they sterilise this excess of local currency through reserve requirements on the banks in that region. Such a central bank can’t actually spend their reserves otherwise it would defeat the purpose of the peg in the first place. Therefore, a pegged currency regime need not lead to a balance of payments crisis if the pegged exchange rate is anywhere near accurate. If the pegged exchange rate is too high the central bank will eventually run out of foreign currency reserves trying to maintain it i.e. Argentina, the UK in the ERM debacle.

There was no sterilising of inflows in the European Monetary Union, as a euro in Greece was supposed to be the same as a euro in Germany. Therefore, when the inflows stopped and reversed which is capital flight the weaker members of the monetary union have an old fashioned balance of payment crisis. None of that need happoen with a currency peg that can just be adjusted by changing the peg.

@ Richard W

The problems of the EZ are technically solvable. However, the political difficulties are too great in my opinion.

Spot on. Your above posts are quite brilliant.

Why do we not hear anything so coherent in the MSM on macro economics or feel that government policies are informed by this kind of insight?

28. So Much For Subtlety

26. Richard W

a currency peg is quite different from a monetary union. If a country pegs their currency to the currency of another nation they do import the monetary policy of the other country. However, the peg is not usually fixed but operates within a trading band allowing some flexibilty.

Thank you for a very clear explanation of the problems of pegs, but I prefer to see a spectrum of options. A peg does not have to operate in a trading band. You can have a simple 1-for-1 arrangement. I believe Hong Kong does and some Baltic states do as well. The local bank can print as many HK dollars as they have American dollars. No more, no less. That is essentially a monetary union. You can peg your currency less strongly – China has an informal peg to the dollar and it allows it to trade within one of those bands as you say.

Every currency peg eventually leads to a crisis if a fixed rate is attempted.

Every peg? I don’t recall any problem with the Irish peg, in fact a monetary union given British pounds circulated freely in the Republic. They kept that until 1979? Around then. Usually countries have different policies which have different fiscal and monetary impacts which means they tend to have problems with a fixed peg. But it is not a feature. It depends on the discipline of the countries involved.

The EZ members are in a monetary union which has led to a balance of payments crisis as capital from other parts of the monetary union flowed into the periphery from the core until it self-evidently stopped.

I am not sure that is the problem. The US has a monetary union. Currency flows there too. Does it cause a balance of payments crisis? Well no. Because each State has sufficiently flexible economic policies to cope. The problem with the Euro has been the very different economies and their restrictive work practices.

There was no sterilising of inflows in the European Monetary Union, as a euro in Greece was supposed to be the same as a euro in Germany. Therefore, when the inflows stopped and reversed which is capital flight the weaker members of the monetary union have an old fashioned balance of payment crisis. None of that need happoen with a currency peg that can just be adjusted by changing the peg.

But that would not have saved the Spanish banks, it would not have saved the Greek economy. The first attempt at currency union was smarter because it would have given Greece, Spain their own individual interest rates. The Euro does not. And there’s the problem – low interest rates in Spain meant a bubble. Greek fiscal incompetence and fraud has caused them problems.

SMFS: no, the US works because its Germanies (NY, NJ, MA, CA and so on) subsidise its Greeces and Spains (AL, MS, AR and so on) by the redistribution that’s inherent in the federal tax and spending system. Fiscal transfers to the low-productivity states balance the system out. It’s got absolutely bugger-all to do with work practices. The fact that people in low-productivity states which survive due to these fiscal transfers tend to elect politicians who oppose the federal government and tax redistribution; whilst people in high-productivity states that pay for the system tend to elect politicians who support it, is amusing of course.

On the currency peg versus one-for-one union point, the whole point about the union is that it’s what allowed Greek interest rates to approach German interest rates. If there’d merely been a peg, the concept that a Pegged Drachma might rapidly depreciate against the Pegged Mark in the event of crisis would always have been in everyone’s mind, and hence a far greater risk premium would always have been required.

30. Richard W

@ 28. So Much For Subtlety

HK actually do operate a linked currency system with an upper and lower trading limit rather than a fixed system. They need to maintain a trading band otherwise a currency speculator could use the HK dollar as a proxy bet for possible renminbi revaluation. However, that is not a monetary union. If I wanted to sell some HK assets and buy USD assets in Washington state in the US, a currency exchange would be required. In a monetary union no currency exchange is necessary.

The Irish Republic is an interesting case. I would maintain that they never really left the sterling zone even after independence. Interestingly the period when one-for-one parity link with sterling was maintained until 1979 was also noteworthy for Irish emigration, underachievement and being one of the poorest nations in Western Europe. The period since the parity link ended also appears to have coincided with improvements in living standards and general macro performance. Not sure how anyone could claim that the fixed parity link did not create problems for them. Before joining the European Monetary Union, they were in the EMS after 1979 and the Irish pound fluctuated quite widely againt sterling 74p – 110p. Their economy self-evidently performed much better in those years compared to the parity years.

Every fixed peg ends in failure like political careers. They always end up coming under speculative attack when the fixed peg does not reflect reality. It is just like putting a big target on your back and the speculators know that they will eventually win. This Kenneth Rogoff paper is an interesting read
http://www.economics.harvard.edu/app/webroot/files/faculty/51_BOKpaper_type.pdf

Of course, no one is really saying that unless the peg is hugely unreasonable that the peg per se is the real problem. Other issues in the economy are the real problems. However, the problems come to a head in the exchange rate if it can’t adjust.

Withdrawing capital from Florida to New York does not cause a balance of payments crisis in the US monetary union because the US has federal institutional mechanisms to offset one area being depressed. Those mechanisms are lacking in the EZ and that is the problem. Therefore, they need to become like a nation state or the thing will just limp on with permanently depressed areas with all the social upheaval that entails. Break it up or pool sovereignty are the real options.

31. So Much For Subtlety

29. john b

the US works because its Germanies (NY, NJ, MA, CA and so on) subsidise its Greeces and Spains (AL, MS, AR and so on) by the redistribution that’s inherent in the federal tax and spending system. Fiscal transfers to the low-productivity states balance the system out. It’s got absolutely bugger-all to do with work practices.

Sorry but no. The Us has a welfare state. That means what transfers there are take place for welfare reasons, not to maintain a balance of payments if you will. That means the payments will always be wrong to maintain the “correct” balance. What is more America had a monetary union a long time ago. The welfare state thing is more recent. So the union existed without the payments. Even as recently as the 1960s half of all Federal spending was on defence. Which is not inherently re-distributive. Poor people pay taxes too, but defence spending usually goes to the richer and more developed states. California for instance. New York in the old days. Not Mississippi. So it does not balance the system out. It has some effect. I am sure welfare payments mean that some African-Americans prefer to stay in Mississippi. But that does not change the fact that huge number chose to move where the jobs were in places like New York, Chicago and California. Thus doing more for the “balance of payments” of these states than any welfare payment. It is this that is slowly happening in Europe – half a million Spanish people are leaving every year. Replaced by roughly the same number of Moroccans. But the Spanish are going to places like Germany to work. That is another way you can keep a monetary union. The people can move.

The fact that people in low-productivity states which survive due to these fiscal transfers tend to elect politicians who oppose the federal government and tax redistribution; whilst people in high-productivity states that pay for the system tend to elect politicians who support it, is amusing of course.

These low-productivity states do not survive because of fiscal transfers. The US government has not, until recently, transferred enough to make that possible.

On the currency peg versus one-for-one union point, the whole point about the union is that it’s what allowed Greek interest rates to approach German interest rates.

Which is why the ERM was a more sensible system given everyone kept their own interest rates. Which is probably the best solution for the Euro – everyone prints their own Euros, but there is a 1-1 peg. Not that it is going to happen now because we are too deep in the hole and because the political cultures of the North and South are too radically different.

32. So Much For Subtlety

30. Richard W

HK actually do operate a linked currency system with an upper and lower trading limit rather than a fixed system.

Thank you for the correction.

The Irish Republic is an interesting case. I would maintain that they never really left the sterling zone even after independence. Interestingly the period when one-for-one parity link with sterling was maintained until 1979 was also noteworthy for Irish emigration, underachievement and being one of the poorest nations in Western Europe. The period since the parity link ended also appears to have coincided with improvements in living standards and general macro performance. Not sure how anyone could claim that the fixed parity link did not create problems for them.

I would agree they never really left the sterling zone – but even though they had a radically different economy compared to the UK, they continued to maintain the currency union for some 50 years. I agree that Ireland’s economic record is not stellar, but that was probably due more to the backward looking Catholic rural oriented policies of successive Irish governments more than anything else. When your government wants to re-create the middle ages, currency union is the least of your worries. So at best it would be hard to sort out the various problems Ireland had. However what they did not have was a problem maintaining the punt to pound link. They made the necessary choices to keep it and keep it they did.

Before joining the European Monetary Union, they were in the EMS after 1979 and the Irish pound fluctuated quite widely againt sterling 74p – 110p. Their economy self-evidently performed much better in those years compared to the parity years.

Now we are talking about something else though. Not whether they could but whether they did better without it. Again, after 1979 they rejected a lot of the past including their priest-ridden social policies so it is hard to say which had a bigger effect. Not that you can just look at those years. You have to look at the long term as well.

Every fixed peg ends in failure like political careers. They always end up coming under speculative attack when the fixed peg does not reflect reality. It is just like putting a big target on your back and the speculators know that they will eventually win.

The problem is with the reality though, not the peg. You can’t decide to spend like the Greeks and have a German type currency. The Irish economy was not remotely like Britain’s but they chose to make the hard choices and keep the peg. Anyone else can do the same. Well, as long as the people you are pegging to are running a sane policy too. This was the problem with the Bretton Woods agreement when America no longer lived up to its end of the bargain and with the ERM when Germany did not. After all, neither America, Canada nor Australia are exactly optimal currency areas. One part is usually booming while some other states/provinces are in depression. But the currency union is maintained because it is worth it and because economic policies tend to be flexible enough to allow it.

Withdrawing capital from Florida to New York does not cause a balance of payments crisis in the US monetary union because the US has federal institutional mechanisms to offset one area being depressed.

And yet areas in America can be depressed for years. The rust belt states would have been much better off for much of the 1980s and 1990s if they had their own currencies. The US government didn’t do much to save them. The South was mostly depressed from the end of the Civil War to God knows when. The 1970s probably. Again the Feds did little to offset that.

Those mechanisms are lacking in the EZ and that is the problem. Therefore, they need to become like a nation state or the thing will just limp on with permanently depressed areas with all the social upheaval that entails. Break it up or pool sovereignty are the real options.

Those mechanisms are lacking, but so is the will to make the system work. If only the Greeks had behaved like Germans. Notice that little Estonia did the tough things and made the hard choices to keep the Euro. They are still screwed but they are now recovering fast. Ideally the south of Europe would be forced to be more like the Germans. They won’t and the system will certainly break up, which is no bad thing, but it would be better for the Greeks if they swallowed the bitter medicine and decided to be more like the Germans in the future.

Ultimately for the long-term health of any economy, there is no alternative to being like the Germans or Swiss. But with the Euro we are probably past the point that is possible.

What the hell is “deciding to be more like the Germans” in this context?

“Run a mercantilist trade policy where you artificially depress wages in order to build a massive trade surplus, then lend the capital flows you receive back to the people who you’re running the surplus with” is a policy that’s worked for German elites, if not the public who’ve had their wages artificially depressed, but *definitionally* isn’t a policy people can “decide to be more like”. Your surplus is always someone else’s deficit.


Reactions: Twitter, blogs
  1. Foxy52

    The other big realisation from George Soros speech – Germany could face an epic crash if Euro unravels http://t.co/WbADbGmI

  2. Frances Coppola

    Why the European Union is doomed in its current form anyway (says George Soros) | Liberal Conspiracy http://t.co/9GSyY6Jz via @libcon #gfc2

  3. safi

    Why the European Union is doomed in its current form anyway (says George Soros) | Liberal Conspiracy http://t.co/9GSyY6Jz via @libcon #gfc2

  4. Nicola Williams

    The other big realisation from George Soros speech – Germany could face an epic crash if Euro unravels http://t.co/WbADbGmI

  5. Michael Amherst

    The other big realisation from George Soros speech – Germany could face an epic crash if Euro unravels http://t.co/WbADbGmI

  6. sunny hundal

    Three months left to save the Euro, says George Soros. And the European Union is doomed (by implication) http://t.co/xOjWU5xy

  7. Matt Lake

    Three months left to save the Euro, says George Soros. And the European Union is doomed (by implication) http://t.co/xOjWU5xy

  8. Thomas Milman

    Why the European Union is doomed in its current form anyway (says George Soros) | Liberal Conspiracy http://t.co/Ag0F1389 via @libcon

  9. @GrannyWils

    Three months left to save the Euro, says George Soros. And the European Union is doomed (by implication) http://t.co/xOjWU5xy

  10. Heinrich Elsigan

    Why the European Union is doomed in its current form anyway (says George Soros) | Liberal Conspiracy http://t.co/33DCewyS via @libcon

  11. BevR

    Why the European Union is doomed in its current form anyway (says George Soros) | Liberal Conspiracy http://t.co/A1A5P92R via @libcon

  12. Foxy52

    Why the European Union is doomed in its current form anyway (says George Soros) | Liberal Conspiracy http://t.co/A1A5P92R via @libcon

  13. Michelle Clarke

    The other big realisation from George Soros speech – Germany could face an epic crash if Euro unravels http://t.co/WbADbGmI

  14. Joseph Healy

    Why the European Union is doomed in its current form anyway (says George Soros) | Liberal Conspiracy http://t.co/Tkpmf93i via @libcon





Sorry, the comment form is closed at this time.