Jan. 25, 2012, 9:51 a.m. EST
Soros: Austerity fomenting Europe tensions
Germans have been traumatized by inflation, billionaire says
By Polya Lesova, MarketWatch
DAVOS, Switzerland (MarketWatch) — Billionaire investor George Soros warned on Wednesday that the austerity Germany wants to impose on other euro-zone nations “will push Europe into a deflationary debt spiral.”
Germans “have been traumatized by inflation and they don’t understand the threat that deflation can cause,” Soros told reporters at the annual meeting of the World Economic Forum in Davos. “There’s a shift in German thinking recognizing this isn’t working, but we’re quite far yet from abandoning this emphasis on inflation as the only threat to stability.”
The euro zone’s sovereign-debt crisis is a major topic this year, with German Chancellor Angela Merkel due to give the opening address this evening and European Central Bank President Mario Draghi set to speak later in the week.
Investors are closely watching talks between debt-laden Greece and private-sector creditors in which the two sides are trying to agree on a writedown of Greek debt that will be voluntary.
“The big issue is how does the euro cope with the danger of a Greek default,” Soros said. “Because that is something that is looming — it may or may not be avoided.”
Soros, an outspoken billionaire and philanthropist, gave a speech on the euro crisis and then took questions from reporters on a wide range of subjects, including China, the U.S., Russia, the Swiss franc and oil prices.
Soros, who has written a new book on financial turmoil in Europe and the U.S., said that measures taken by the European Central Bank in December have relieved the liquidity problems of European banks, but “they did not cure the financing disadvantage from which the highly indebted member states suffer.”
High risk premiums on Italian and Spanish bonds threaten the capital adequacy of banks and leave weaker euro-area nations “relegated to the status of third-world countries that became highly indebted in a foreign currency,” he said.
Instead of the International Monetary Fund, “Germany is acting as the taskmaster imposing tough fiscal discipline,” Soros said. “This will generate both economic and political tensions that could destroy the European Union.”
The billionaire investor said that fiscal discipline alone isn’t enough to solve the crisis and that the EU will have to provide stimulus to get out of the deflationary spiral. “This will require euro bonds in one guise or another,” he said.
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