The dire economic situation in which most of the rich world found itself in 2011 was not merely the result of impersonal economic forces, but was largely created by the policies pursued, or not pursued, by world leaders.
Indeed, the remarkable unanimity that prevailed in the first phase of the financial crisis that began in 2008, and which culminated in the $1 trillion (£645bn) rescue package put together for the London G20 meeting in April 2009, dissipated long ago. Now, bureaucratic infighting and misconceptions are rampant.
Worse still, policy disagreements are playing out more or less along national lines. The centre of fiscal conservatism is Germany, while Anglo-Saxon countries are still drawn to John Maynard Keynes. This division is complicating matters enormously, because close international co-operation is needed to correct the global imbalances that remain at the root of the crisis.
Doubts about sovereign debt in Europe have revolved around the euro to such an extent that some now question whether the single currency can survive. But the euro was an incomplete currency from the outset. The Maastricht treaty established a monetary union without a political union – a common central bank, but no common treasury. Its architects were aware of this deficiency, but other flaws in their design became apparent only after the crash of 2008.
The euro was built on the assumption that markets correct their own excesses, and that imbalances arise only in the public sector. As it happened, some of the largest imbalances that fuelled the current crisis arose in the private sector – and the euro's introduction was indirectly responsible.
In particular, sovereign debt in the eurozone was deemed riskless: banks had only to hold minimal reserves against member countries' bonds, which the European Central Bank accepted on equal terms at its discount window. Member countries could borrow at practically the same interest rate as Germany, and banks were happy to earn a few extra pennies by loading up their balance sheets with the government debt of the eurozone's weaker economies. For example, European banks hold more than a €1 trillion (£825bn) of Spanish debt, with German and French banks holding more than half of that sum.
Instead of the convergence prescribed by the Maastricht treaty, the radical narrowing of interest-rate differentials generated divergences in economic performance. Countries like Spain, Greece, and Ireland developed real-estate bubbles, grew faster, and developed trade deficits with the rest of the eurozone, while Germany – weighed down by the costs of reunification – reined in its labour costs, became more competitive and developed a chronic trade surplus.
The convergence of interest rates was broken when a newly elected government in Greece revealed that the deficit incurred by the previous government was much larger than had been reported. European authorities were slow to react, because member countries held radically different views.
Germany, traumatised by runaway inflation in the 1920s, and its dreadful political consequences, adamantly opposed any bailout. Moreover, it was heading into an election cycle, which increased the rigidity of its position. With German leaders insisting on charging penalty rates for providing assistance, the crisis festered – and the rescue costs continued to grow.
Indeed, as eurozone members' inability to print their own money effectively relegated them to the status of less-developed countries that must borrow in a foreign currency, risk premiums widened accordingly. The authorities, seeing no solution, kicked the can down the road – an approach that usually works, because problems become easier to solve when markets calm down. But, in this case, the crisis kept growing bigger, and the authorities ran out of road when Germany's constitutional court ruled out additional guarantees beyond the European financial stability facility (EFSF) without the consent of the Bundestag.
At the European Union's 9 December summit in Brussels, the eurozone countries agreed to establish a closer fiscal union. But, by the time this decision was taken, it was no longer sufficient to bring the financial crisis under control.
The measures introduced by the ECB went a long way toward relieving banks' liquidity problems, but nothing was done to reduce the large risk premiums on government bonds. Because the premiums are intimately interconnected with the banks' capital deficiencies, half a solution is not good enough. Unless the sovereign debt of the rest of the eurozone is successively ringfenced, a Greek default could cause a meltdown of the global financial system.
Even barring such a nightmare scenario in 2012, the summit sowed the seeds of future conflicts – over the emergence of a "two-speed" Europe and the false economic doctrine guiding the eurozone's proposed fiscal pact. That doctrine, by imposing austerity in a period of rising unemployment, threatens to push the eurozone into a vicious deflationary debt spiral from which it will be difficult to escape.
Copyright: Project Syndicate, 2011.
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6 January 2012 11:56AM
There was an extremely distressing report on BBC World Service early today about Greek mothers giving up their babies because they can no longer afford to keep them.
I hope the Messrs Merkel, Sarkozy and Barosso - and their corporate banker 'friends' - may one experience similar suffering.
6 January 2012 12:09PM
Never. When the world feared nuclear war our leaders always ensured they had the deepest bunkers to hide in. 'Because I'm worth it.'
6 January 2012 12:12PM
The whole point about the Euro was that it was supposed to precipitate a convergence amongst Eurozone economies. In fact the exact opposite has occurred. None of the solutions thus far suggested to the crisis even address this issue, in fact they will exasperate it.
6 January 2012 12:17PM
Hearing people like Soros bleat warms my heart.
6 January 2012 12:18PM
I don't think Keynes meant that you should pay the banks to dig themselves into a hole so deep you can't see the bottom, and then get the public to shovel all of their money into it.
6 January 2012 12:18PM
It seems that in 2008 Gordon Brown was right.
6 January 2012 12:21PM
Coming to high street near you soon.
Not being in the euro, as it crashes down to nullify the sterling devaluation, and being semi-detached from the eu will not insulate the UK economy against the consequences of a major contraction in the eurozone economy. It will mean reduced demand for UK goods and services with the awful consequences for employment that entails.
UK engagement with the eurozone should be much more constructive, even if that means supporting a more orderly break up of the eurozone.
6 January 2012 12:21PM
And it's going to be a lot longer than a year of, and it's 'decision' not 'indecision'.
The decision is... let American's get smaller cars.
6 January 2012 12:22PM
I agree with all of this entirely. But what is the solution?
There will never be a political union between the countries of the Euro that Mr. Soros points out as the root of the Eurozone's problems.
I would be much more interested to know how Mr. Soros rates the survival chances of the Euro and, whether the dissolution of the Euro is the answer to the problems that he identifies. If it is then this, however painful, needs to happen sooner rather than later.
6 January 2012 12:24PM
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6 January 2012 12:25PM
Where does he bleat?
6 January 2012 12:26PM
Soros bleating? Seems entirely accurate to me.
6 January 2012 12:27PM
From the start... to the end...
6 January 2012 12:28PM
You might be right *
It is a pity that he was so very badly wrong for the preceding 11 years over the deficit and on shifting bank regulation from the Bank of England to the FSA.
*I think it is too early to tell - allowing stupid banks to fail but protecting only non-financial depositors might have been the way to go. Bailing out RBS et al. was about bailing out other banks who had lent it money.
6 January 2012 12:29PM
Doesn't sound like bleating to me - I'm sure he personally will have profited from all this.
6 January 2012 12:38PM
No.. I think he's bleating because not only is he not going to be able to profit from all this.
If the Europeans continue down this line... the chances are that the dollar and the pound will suffer as well.
Whilever someone is pointing a gun at you and telling you to use monopoly money as your reserve currency.. you will.. but when they stop pointing a gun at you.. you'll start using the currency that seems to be run properly... by people who don't print money to default on their debts...
The world is changing... and that's what Soros is bleating about.
6 January 2012 12:39PM
Excuse me,but how exactly did this guy Soros make his fortune? And there are people here who would lick his shoes.Pathetic!
6 January 2012 12:41PM
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6 January 2012 12:43PM
I am always puzzled why experts suggest that a two speed Europe is a future possibility, when in reality it already arrived several years ago. The peripheral countries are consigned to many years of austerity and recession, just in order to protect the project and banks, whilst those at the core, (mainly Germany), do very nicely thank you!
6 January 2012 12:48PM
Soros' version of austerity seems to be not bailing out the banks again. He only alludes to the 'liquidity' crisis of large banks, not the fact that most of them are insolvent. He seems to be advocating artificially inflating the system with more national debt/printed money (i.e. our future earnings) so the show can continue for a bit longer. Long enough that is for 1%ers like himself to carry off all our real assets before the whole system comes tumbling down.
What needs to happen is default and bank collapse - the debt needs to be written off or paid down - every asset that's being held on balance sheets at pre-2008 prices needs to be revalued and the bankers and fund managers need to suck up their losses.
Soros looks after Soros; he's not interested in the welfare of the rest of us. When it all collapses him and his like will have the security guards and the gold to cope.
6 January 2012 12:52PM
Greece has already partially defaulted, and even hat haircut is unravelling.
So how will the crisis escalate? Greece won't be able to pay, but their poliicians will sign up to anything to get the next IMF fix.
Ireland Spain, Portugal Italy and France will get recession.
There will be endless eurosummits, secret, like the one on this weekend, and public.
There is no sign at ALL that Merkel and Schäuble even understand what a recessionary spiral is. The only General Theory Angie understands is Einstein's. Keynes was banned where she grew up.
There will be a New Deal after the German general elecion in 2013.
Until then, it will be hell.
6 January 2012 12:55PM
A start would be to stop increasing the debt exponentially with the scam that is interest.
6 January 2012 12:59PM
This article contains a remarkable lack of any interesting insight or prediction.
Hopefully Soros has fallen on hard times which is why he needs to earn a few pennies from syndicated articles like this.
6 January 2012 1:04PM
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6 January 2012 1:07PM
Tom 1896: Do you have a link, a time, or a programme name for that report? I would like to hear it and have had no luck googling.
6 January 2012 1:11PM
Global debt jubilee or hyper inflation. There's no other way out.
6 January 2012 1:12PM
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6 January 2012 1:14PM
Great to see the Guardian publishing George Soros. Because he is obviously part of the 99% Occupy movement isn't he. No way he is part of 1%.
6 January 2012 1:14PM
soros networth 22billion$us
6 January 2012 1:15PM
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6 January 2012 1:16PM
l think Soros is saying "go short on the euro because its looking like a one way ticket at the moment".
6 January 2012 1:17PM
In the 27 EU nations, I count just TWO Anglo-Saxon nations: the UK and Eire. Both are engaged in significant austerity programmes and shy away from Keynesian re-investment policy.
Is Mr Soros on the page as us?
6 January 2012 1:21PM
Well.. I think Eire would complain about your description of them as Anglo-Saxon..
Sure.. they speak English.. That's it.
Culturally and politically they are anything but Anglo-Saxon.
Britain on the other hand is not only addicted to swivel eyed economics, it's stuck in it and can't get out.
6 January 2012 1:25PM
George Soros- who would want to have anything to do with him whatsoever ?
6 January 2012 1:30PM
Right to transfer billions of public liabilities from the private to the public sector?
Tell that to the Irish, as they battle to pay for the excessive guarantees that the then government gave to their banking sector.
6 January 2012 1:30PM
Eh Bertrand Chorizo :
Eire is not an anglo-saxon country.
That said, you are spot on about the Keynesian approach. The US offerred a paltry package to industry but that was hardly New Deal scale stuff... and was dwarfed by the bailouts handed out to the finance sector.
For the first world debt crisis to be solved in 2012 will require a lot more than Eurozone solidarity. To think otherwise is to have slightly warped ideas about how the UK can ever pay back its +400% of GDP external debt without printing itself into hyperinflation...
6 January 2012 1:34PM
Well, Amnesty International for one, as George is one of their main benefactors. He's actually quite a philanthropist, and donor to multiple causes, many associated with human right.
He's also hated by the American right for his funding of 'liberal' (i.e. left wing) organisations there.
6 January 2012 1:35PM
He already has profited from the crisis - MF Global was bankrupted due to it's over-leveraged positions on European Sovereign debt and he's bought up a load of it - $2billion apparently:
http://articles.businessinsider.com/2011-12-12/wall_street/30507093_1_george-soros-soros-fund-management-bonds
Nothing wrong with profiting from the greed and stupidity of other companies I guess, but when you factor in the $1billion plus customer funds that were looted by MF Global and haven't been 'located' yet..
6 January 2012 1:39PM
I don't think we need any attempt at insight from Mr Soros. After all, well, this for one example.
It is people like him who caused this. Not democracy.
6 January 2012 1:41PM
@GeorgeSoros
You are absolutely right, but equally, and realistically speaking, when the euro was launched could a French taxpayer have accepted the idea that her/his taxes would be pooled together with those by a Dutch, German or a Greek under a union that would have been much more than monetary -- effectively a fiscal union? Mr Soros, most unfortunately for humanity, iron is most of the time forged in fire. It takes dramatic events and the experience of pain for humans to learn to see a little farther than the length of their nose. Even now, in the likes of France and elsewhere in the eurozone, we have ill-minded far-right politicians (populist charlatans), as well as far-left ones (the other kind of charlatans), speaking the politics of fear, of protectionism.
Incidentally sir, I admire and follow your work very closely. And those of my compatriots (I'm British) who most ignorantly speak ill of you, they should think first of how many British financiers or wealthy individuals there are who have worked so genuinely and effectively, as you have, for the benefit of others much less fortunate -- worldwide and irrespective of creed and skin colour.
Long you may continue with both your works and your reflections...
6 January 2012 1:45PM
'Eire'
That term's not in use any more, is it ?
6 January 2012 1:45PM
So now most are agreed - the euro is a disaster.
Pity so many pig headed politicians and bureaucrats wouldn't listen fifteen years ago when those who expressed serious doubts were either written off as mad or as little Englanders! It is not even as if it was difficult to predict. Welding together the laid back Mediteranean economies with the mighty Germany was always going to end up in disaster.
My question is why the hell are these people still making the decisions? They are guilty of catastrophic incompetence and in any decent world would resign and hang their heads in shame.
6 January 2012 1:47PM
Oh I'm sure he can profit indirectly.. but currently the issue with the Euro for people like Soros is that you can't trade it like you can the dollar or the pound. And for some reason the Europeans don't want to let europe get flooded with joke dollars.
6 January 2012 1:50PM
*puts fingers in throat like they do on friends*
6 January 2012 1:50PM
soros has donated more than 8billion in 30yrs to various charities groups and individuals
6 January 2012 1:51PM
On the contrary, we need precisely the insight of George Soros who by shorting the grossly over-valued pound sterling forced the UK out of the ERM and into a devaluation which led to several years of growth under the last tory administration. This enabled the tories, despite their own efforts, to hand over an expanding economy to Gordon Brown. We'll gloss over what happened thereafter.
Never mind this tosh, what is really very worrying is not the projection of what might happen. It is the fact that we are all in deep doo doo already. Spanish unemployment levels are reaching those of the 1930s, almost 50% are out of work among young people. That means that whole cities must be unemployed. Ok the safety net is better than it was, they aren't quite starving, but this does not detract that we are already in a hole and still digging.
What is coming is very nasty indeed.
6 January 2012 1:51PM
and a further 30billion to be given over a 20yr period. my cap is out!
6 January 2012 1:51PM
I am tired of this crisis... I am tired of seing the markets kicking Spain or Italy... I am tired of seing France and UK fighting or Germany trying to get something from this. This is a game where few guys are getting the profits while the rest pay.
6 January 2012 1:52PM
I hear Tony Blair is a catholic too...
He probably has to take tramadol of an evening to drown out the screaming too..
6 January 2012 1:54PM
Most of which was used to destabilise governments so that he could get a foot in there... or as he puts it 'to promote democracy'.