Saturday, June 9, 2012

Beware of brilliant minds! George Soros maybe?

George Soros has made a prediction. Again. EU-authorities have a 3-month window to correct their mistakes; or else! To Soros, it is clear what is needed: a European fiscal authority that is able and willing to reduce the debt burden of the periphery, as well as a banking union.

Mr. Soros is undoubtedly a brilliant mind but as opposed to brilliant minds who come from academia, he is a brilliant mind who comes from the hedge fund industry. His claim to fame is having once successfully blackmailed the UK government. Would you entrust such a man the future of Germany’s tax money and bank deposits?

It is safe to predict that we will neither see a European fiscal authority nor a banking union in the foreseeable future, and that is good! The EU has enough institutions to solve its problems. What the EU lacks are political leaders who are pepared to call a spade a spade and to define problems in simple language. To stay with the language of hedge fund managers: there is always an underlying and a derivative. In today’s Eurozone crisis, the debt problems are the derivatives. The underlying is how some of the deficit economies work.

Take Greece as an example. After 4 years of crisis with dramatic declines in the level of economic activity (including a decline in imports from 64 BEUR in 2008 to 47 BEUR in 2011), Greece still ran a current account deficit of 8% in 2011. For 2012, it is likely to be lower but still well over 5%. Greece is still spending 1.380 Euros abroad for every 1.000 Euros it earns abroad. At it is importing even 2.205 Euros for every 1.000 Euros it exports. The numbers for Spain and Portugal are similar.

The normal procedure is that one first makes a business plan and then one structures the financing around it. For over 2 years now, EU-authorities have focused on financing structures without discussing a business plan for the Eurozone overall and for individual countries. This is like saying: “We don’tknow where we are going but the faster we drive, the sooner we’ll get there!

The problem is that financial markets do not see today how the underlying of the Eurozone in its present structure can work again. The levels of competitiveness are too different between the Core and the Periphery. And as a result of this uncertainty, markets speculate with the derivatives.

The wonderful thing about a plan is that if it credibly points towards a light at the end of the tunnel, towards a turn-around from current chaos, then markets will cease to speculate against it.

Such a plan for the Eurozone must focus on bringing the flow of products, services and capital back in balance again. Free market forces alone will not achieve this because in a country like Greece, the free flow of imports into and the free flow of capital outside the country have ruined the economy. Instead, there will have to be – at least for a certain transition period – very strong incentives and disincentives to achieve the desired results. How that could be done should occupy the most brilliant minds.

The idea that surplus countries transfer money to, say, Greece so that Greece can import all the products it wants to have and that Greeks can transfer all their savings abroad – that is not a workable idea for either the surplus countries nor for Greece. Surplus countries simply will refuse do to it forever and Greece has deserved better than to assume the role of the recipient of donations from others.

Greece ranks as the EU’s least attractive place to do business (World Bank) and as the most corrupt country (TI). The overall objective of a new business plan would have to be to dramatically turn these two ratings around. Greece would have to start new production for import substitution. Financing should come from private foreign investment. The latter, of course, will only come if Greece becomes an attractive place to do business and less corrupt.

One cannot change an entire country from A-Z in a short period of time. One can, however, start from scratch in selective areas and wherever one starts froms scratch, one can start the right way. Special Economic Zones would be the right instruments for facilitating “new economic beginnings” in parts of Greece. If they work well, they will rub off on the rest of the economy over the years.

The surplus countries won't be able to have the cake and eat it forever, and Greece will not forever have food if it doesn't start baking cake on its own. These could actually be very good times for the Eurozone: the Euro has lost about 25% of its value in a rather short period of time. The Eurozone should normally be spending its time figuring out how to take advantage of this new competitiveness in world markets.

Instead, the entire focus is on financial acrobatics and Mr. Soros makes sure that it stays that way. Perhaps the brilliant hedge fund manager has a financial position to protect.


  1. I very much liked the phrase: "Would you entrust such a man the future of Germany’s tax money and bank deposits?" I couldn't agree more!

  2. It would be interesting to know whether the brilliant Mr Soros pays any taxes in Greece or helps his country in any other way (some direct investment might be an idea, for example).
    If his only suggestion is that others pay for the Greek debt via eurobonds, then I think we are much better off without his advice.

    1. George Soros is a Hungarian/American, if he doesn't earn any income in Greece or own any property there then why should he pay taxes in Greece.

      He funds the largest English language post grad university in Central Europe - its in Budapest, capital of Hungary.

      His main interest these days is getting BHO reelected, they sing from the same Hymn Sheet - the EuroKrisis is killing the USA recovery.

  3. If Soros does not earn income in Greece or own property there then why should he pay taxes there.

    Soros does help 'his' country by funding the largest English language post grad university in Central Europe - The CEU - it's in Budapest. Soros was born in Hungary, his parents were Hungarian.

    Soros is singing from the same hymn sheet as BHO, that's his main interest, getting BHO over the line in November. If that means blaming the flagging USA recovery on the Euro-Krisis then they are following in the ancient tradition of the Greeks - never lose an opportunity to blame someone else.


  4. "Such a plan for the Eurozone must focus on bringing the flow of products, services and capital back in balance again."

    I agree.

    But what's the point of having a common currency then?

    The easiest way to achieve this would be by reverting to national currencies.

    But having a common currency does require the solutions that Mr Soros advocates, or else the poorer areas will be driven out of the monetary union. So, yes, if Europe wants to maintain the common currency, transfers are gonna have to take place (the solution that you suggest - a reduction of the German surplus - is an indirect transfer anyway). And if Europe doesn't want to maintain the common currency, oh well. Europe never had it in her anyway.

    1. What WAS the point of the common currency? Primarily a political one, if I recall. Hoping that a common currency would accelerate European integration. Avoiding FX transactions costs. Etc.

      Please bear mind that not even the US has what Mr. Soros advocates for the Eurozone. If California runs out of cash, California runs out of cash; period. They then have to issue IOUs for a while. And no one would think that this could endanger the future of the USD or the American Union for that matter (even though California is a huge part of the US economy).

      If there were run on Californian banks and they no longer had enough securities to pledge as collateral for Fed refinancing, a bail-out would be engineered where quickly those banks had new owners which have the markets' confidence.

      Germany (like most countries, I presume) has an internal transfer union. When a federal state violates principles, it is placed under supervision. No chance that Bavarians could claim that such a supervision would violate Bavarian sovereignty. I am not sure that a country could act like that.

      I simply do not take it for granted that the Eurozone had to fail. If the Eurozone's beginning had not coincided with the largest tsunami of liquidity the world has ever seen where banks lent money like there was no tomorrow, things might have developed differently (regards to Alan Greenspan...). If Maastricht had included only one additional criteria such as "current account deficits no higher than 3%" things would definitely have been different.

      All I am saying is: we blew it the first time around. Go give the thing a second chance and do it right this time. If things work out, there may even be some money left to pay for the errors of the first round. If not, I am afraid you simply have to write off the first round. If that's the price to pay for a successful second round, why not?

    2. Sorry, I don't think the comparison with the United States is apt.

      The US have a federal government, whose Treasury oversees a yearly budget equal to 20% of GDP. This budget finances the country's defense, insurance, health, and school systems. These are enormous costs that the states don't have to deal with, or deal with fully. Imagine if something similar existed within the Eurozone. Would there be solvency risks then?

      However the chances of something like that happening are nil. Simply put the Europeans will never accept to share such costs, which just goes to show how the Euro was a bad idea from the begining.

      Furthermore the US has a central bank whose way of functioning (primary dealers) guarantees that bond sales will be fully covered, and whose mandate covers both full employment and low inflation, as opposed to the ECB whose mandate covers only low inflation, and whose way of functioning aggravates any solvency risks, not to mention it's monumental blunders when it came to monetary policy (low interest rates suitable for the core, but ruinous for the periphery).

      The Eurozone countries still haven't grasped what monetary union really means. When we had the Drachma, the government would subsidize the poor areas in indirect ways (by building universities, by subsidizing transportation, by incorporating lower VAT etc). And if that meant that we would need to devalue, so be it. Because the residents of a country have this sort of solidarity between them. It's exactly this kind of solidarity which is missing from the Eurozone, and this why the Euro will fail in the end.

      PS - Regarding adding 3% account deficits as Maastricht criteria: a couple of years ago, in one of the G7 meetings, US Treasury Secretaty Timothy Geithner suggested that this be done in a global scale. Germany and China shot down the idea.

    3. My offhand comparison triggered your specific comparisons with which one can, of course, not argue. The EU is not like the US and can/will never be. No, I did not know that Geithner had made this suggestion. There is an article in this blog titled "A comparison with the USA" (cannot insert link here...). Yes, the consumption-obsessed and no-debt-fearing American consumer has for decades now been a major trigger of growth and wealth elsewhere. That can go on because the US is such a wealthy country and interesting place for foreign investment but it can't go on forever. Read the wonderful tale about "Warren Buffett's simple wisdoms".

      If all had known then what we know now, the Euro would probably never come into existence. EU-elites can only blame themselves because there were enough outsiders who had warned them (not only Anglo-Americans!). As late as 2008, EU-elites blamed every "dissenter" for "talking down the Euro to preserve American hegemony".

      In my view (and I lived in the US until 1990), the Euro was the culmination of post-WW2 European hybris. After the end of the Cold War, Europeans felt the need for a counterweight to the US in the form of "Europe as a world power". They did not want to accept that while "Europe as a sum of separate and competing countries" had become strong, "Europe as an entity" had never achieved much of anything. They couldn't even pay for their own defense but they could create unbelievable monsters of welfare states and bureaucracies with the money they saved. Whenever a problem came up (i.e. Yugoslavia), they cried help to those Americans which they always criticized so much.

      I could go on and on but it wouldn't help anything. We have the Euro now; the "miracle story of the Euro" has turned into a nightmare. We (Europeans) could keep lamenting and tell each other how all of this is so unfair. Or we could look the changed and new situation straight into the eye and deal with it as best as we can. This I what can-do-oriented Americans would do. But they are - in our enlightened European judgment - just barbarians who do not understand the subtleties of European cultures. After observing 3 years of meandering on the part of EVERYONE (not only the Greeks), I fear the chances are high that we will not see Europe 's finest but rather it's most embarrassing, costly and painful hour. Greeks will blame it on Germany and Europeans will blame it on Americans...

  5. I agree.

    That said, it's not too late for solutions. Here's an idea: allow the countries that lose access to the markets (and only these countries) to impose tariffs on intra-european imports. Half of the revenues from the tariffs would go to boost the process of state deleveraging (until it meets the Maastricht criteria) and the other half would go to productive investments. In the meantime, expensive imports would incentivize local industry to reinvigorate itself.

    On the downside, Germany (and it's satellites) would see their surpluses being significantly reduced. But I think that the German electorate would prefer that than having to pay for direct transfers. And it's clear that pure austerity is too disruptive to continue as it is in the periphery (reforms would have to continue of course).

    1. Go to my Blog Archive on the right; go to September 2011; look for the article "Endgame for Greece" (September 16, 2011). Its original version was written 2 years ago. I think you will like it.

    2. Back at the laptop, the backlinking works again. Here are the two articles.

  6. Wow: da wehrt sich mal ein Deutscher. Und nicht ein kleiner Blogger, wie sich und ich, sondern ein veritabler Wirtschaftswissenschaftler ( Werner Abelshauser macht aus seinem Herzen wahrhaftig keine Mördergrube:

    "Während das politische Management der Euro-Zone auf seiner Flucht nach vorn immer größere Risiken in Kauf nimmt, gehen die Kapitalmärkte in die mediale Offensive: An der Spitze marschiert George Soros, einer ihrer berüchtigten Repräsentanten, der Europa nur mehr eine Frist von drei Monaten gab, um allen Anforderungen der "Märkte" zu entsprechen. Die Bankenlobby hörte das Signal - und folgte mit Schreckensszenarien, die die Alternativlosigkeit des politischen und finanziellen Vabanquespiels der Euro-Rettung belegen sollen. Dahinter trotten jetzt auch US-Ökonomen, die uns in der Rolle nützlicher Idioten auffordern, aus der Geschichte zu lernen: "Denkt an 1933", meinte etwa Nouriel Roubini in einem FTD-Gastkommentar."

    Und das in der Financial Times Deutschland! [Da hat denen ihr Boss Thomas Fricke aber nicht aufgepasst, sonst wäre so etwas nicht passiert ;-) ]