A comment on Soros

For a long-time a bête noire amongst pro-Europeans because of his status as the financier that forced Britain out of the Exchange Rate Mechanism and thus cemented the UK’s outsider status in European monetary integration, George Soros has recently emerged as one of the most authoritative commentators on the ongoing Eurozone sovereign debt crisis. His most recent article in the New York Review of Books was one in a long line of alarmist but thoughtful interventions into the debate.

Soros’ main argument is that Germany needs to choose between either fully backing the Euro or leaving the Eurozone altogether. Lacking the will to act as paymaster, but determined to keep the Euro together, Germany has been accepting the bare minimum that is needed to keep the currency union together. According to Soros, this is a case of the cure being worse than the disease. By insisting on national responsibility for EU-incurred debts, Germany risks recasting the egalitarian European integration project around the twin poles of creditor and debtor. Debtors are pushed into deflationary traps as they struggle under debt burdens and national antagonisms deepen as debtor states survive on a Euro drip provided by miserly creditors. All in exchange for deep cuts in social protection and welfare.

The novelty of Soros’ argument lies in his claim that a German exit from the Euro would save rather than sink the currency. His reasoning is clear. When a debtor – like Greece – leaves the Euro, the benefits of a depreciating new currency are offset by the strangling effect of Euro-denominated debts rising dramatically in value. When a creditor like Germany leaves the Euro, however, the situation is different. The creditor, of course, faces a loss. But those remaining in the currency zone benefit enormously: depreciation of the Euro would bring competitiveness back to Eurozone members and the main political obstacle to further political integration –German obstructionism – would have disappeared. The Eurozone would be free to introduce key measures – debt mutualisation, for instance – that would exist were it not for Germany.

By blaming Germany, Soros’ argument appears as part of a more generalized anti-German sentiment popular all across Europe. In fact, Soros himself seems rather comfortable with the idea of a German-dominated Europe. He would just rather that Germany accept the responsibility that comes with empire. As he puts it, “imperial power can bring great benefits but it must be earned by looking after those who live under its aegis”. Soros’ advocacy of German paternalism is hardly a compelling vision. But his focus on the German origins of the crisis are welcome as they challenge the notion that profligate spending by Southern cone European governments is at the heart of the current mess. But there are limits to the blame game.

It is certainly the case that German banks and businesses benefitted from the introduction of the Euro. In particular, it meant that consumers in Southern Europe could – via public or private borrowing made possible by the low risk premiums brought about by monetary union – buy German exports. But it is also the case that in the late 1990s and early 2000s, Germany was – as The Economist put it – the “sick man of Europe”. The changes put in place by Chancellor Schroder were far from socially neutral: labour markets were liberalized and wages were frozen or cut in real terms. Only the Social Democrat’s hold over the trade unions made this possible. Germany underwent an internal devaluation with the burden of adjustment squarely pushed onto the German working class. It was in this period that Die Linke, a party to the left of the SPD, was created. The sentiment driving German caution in this crisis is thus a complex one. It certainly involves some miserliness and a good dose of anti-Southern prejudices. But it also includes an understandable fatigue on the part of German workers at having to bear the burden of adjustment. When we read that in recent weeks banks have been holding over 700 billion Euros in surplus liquidity at the ECB, it seems that there is ample room for some adjustment on the part of German capitalists.

Soros’ account of the crisis is also curiously Eurocentric. As someone aware of the global dimensions of the current economic and financial crisis, he chooses to focus on the unique features of Eurozone governance. Had the Eurozone been armed with a common treasury, and not just a European central bank, Soros suggests that there would have been no Eurozone crisis. Policy mistakes, tied to the short-sightedness of Eurozone policymakers, have caused the crisis. This is at best a partial explanation. Outside of the Eurozone, the British and US economy are struggling to exit a major economic downturn. The crisis itself – beginning with the Lehman Brother’s collapse – originated in the US. Popular mobilization against the inequalities that have build up in recent decades is not European either. It was unwise to create a common currency without institutions capable of exercising the required political discretion in a time of crisis. But the crisis is one of capitalism, not just of the Eurozone. Were the right institutional fixes to be introduced, we would still be faced with the twin problems of financialization and debt-financed growth. And endlessly replicating an export-based growth model raises the question of who will be the “market of last resort”? In focusing on the Eurozone, Soros misses the wider dimension of the crisis.