Caixin: You experienced the Asia financial crisis and now we are in the middle of the euro debt crisis. What are the differences?
George Soros: Actually, there is a remarkable similarity — a weakness in the structure of the world. The countries that became heavily indebted in euros turned out to be in a similar position to the Asian countries that became heavily indebted in U.S. dollars.
Both are borrowing in a foreign currency. You see, this is something that I didn’t realize until recently: The euro is not controlled by individual countries. They have no control over issuing the currency. They are in the same position as a third-world country borrowing in a foreign currency.
And in the case of Asian countries, it was the IMF that imposed strict fiscal discipline. In the case of European countries, it was Germany that was fulfilling the same function. And that policy of strict fiscal discipline is counterproductive because it pushes the country that is heavily in debt into a recession, while the debt burden actually increases. And that is what’s happening in Europe.
Caixin: When a financial crisis arrives, people claim there are two forces at play: One is from rational market investors, the other is from speculators. In terms of the euro crisis, which is the dominant force?
Soros: I believe that it was mainly caused by a lack of understanding about how financial markets really operate. European authorities have had very little interaction with the market, little experience. So financial authorities in the Anglo-Saxon world understand markets better than continental Europeans.
I gave a long list of mistakes made by European authorities in dealing with the Greek crisis, always doing too little too late. That’s what aggravated the crisis. To me, it’s very convincing.
Caixin: You said previously there should first be fiscal consolidation in the wake of the euro crisis, then restructuring. What else is needed?
Soros: Fiscal discipline at a time of economic decline creates this deflationary spiral. But given the fact that Germany does not want to be the deep pocket, financing other countries, you can’t avoid first imposing fiscal discipline. Then, you must find a way to exit this vicious circle. And this cannot be done by the individual countries.
Keynes would have argued that creditor countries should stimulate their economies to offset recession in debtor countries. Now, the biggest creditor country, Germany, is obliged by its constitution to balance the budget. Therefore, it cannot stimulate.
The only possibility for stimulation has to come from the European Union. It has to be underwritten, supported or guaranteed by all member countries acting jointly and that means some kind of euro bond. Which is of course something that (German Chancellor) Angela Merkel is opposed to.
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