Eurozone Debt Crisis: Why the Next Three Months are Crucial
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Many people wonder how much longer the Eurozone can survive as it struggles to deal with its plaguing debt crisis.
Well, billionaire investor George Soros has the answer.
On Saturday, in a thorough and enlightening speech made at the Festival of Economics in Trento, Italy, Soros gave the region a deadline for resolving its debt debacle.
"In my judgment the authorities have a three months' window during which they could still correct their mistakes and reverse the current trends," said Soros. "By the authorities I mean mainly the German government and the Bundesbank because in a crisis the creditors are in the driver's seat and nothing can be done without German support."
Soros said that if Germany hasn't supported a more sufficient Eurozone bailout by the fall, it could be too late.
"By that time the German economy will also be weakening so that Chancellor [Angela] Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities. That is what creates a three-month window," said Soros.
The Soros View on the Eurozone Debt Crisis
Soros also outlined his economic policies, which are based on the fundamental idea that markets are imperfect and that bubbles frequently arise due to ignorance and the fallibility of the market's participants.
He then went on to explain how the Eurozone debt crisis fits into these theories and how "there is a bubble involved, after all, but it is not a financial but a political one."
"I contend that the European Union itself is like a bubble," said Soros. "In the boom phase the EU was what the psychoanalyst David Tuckett calls a "fantastic object" - unreal but immensely attractive. The EU was the embodiment of an open society - an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position."
Soros explained how the European Union followed a trend of integration. He said Germany used to be at the forefront of that movement.
The integration climaxed with the Maastricht Treaty in 1993 creating the European Union and the subsequent introduction of the euro currency.
After the euro entered circulation a period of stagnation followed up until the financial crash of 2008, where integration ceded to disintegration.
Soros said the Eurozone debt crisis really started with a declaration by Germany.
"The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect."
Identifying this point as the start of the crisis enables people to see how Greece, Italy, Spain, and others became troubled economies. Prior to Merkel's declaration the markets looked at these countries as risk-free. Once they realized these government's bonds were not riskless and subject to speculative attack the premiums dramatically rose, Soros explained.
He sums up the origins of the Eurozone mess very concisely:
"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 effects of the disintegration and the ensuing crisis have left Europe with haves and have-nots. Soros says the crisis is only getting deeper.
"The real economy of the Eurozone is declining while Germany is still booming," said Soros. "This means that the divergence is getting wider. The political and social dynamics are also working toward disintegration. Public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed. So something has to give."
Eurozone Fate in German Hands
Soros expects that the euro will remain intact as Germany will do what it can to protect it.
A European summit to discuss the latest developments in the Eurozone debt crisis is scheduled for the end of this month. Soros said we are at an "inflection point" where the markets can only take so much more of this temporary relief. He said the trends that caused this crisis need to stop and stop soon.
Soros finished his speech with a final request, a resolute warning and plea to Europe and mainly Germany.
"We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be," said Soros. "The future of Europe depends on it."