October 17, 2012

Europe needs a Soros Salvation Army

George Soros has put the matter nicely at the National Association for Business Economics in New York.
If the world could somehow persuade Germany to pull out of EMU, Europe’s never-ending crisis "would disappear in thin air".
The residual euro would fall to a level that better reflected economic fundamentals in Southern Europe. Competitiveness would largely be restored at a stroke, without the need for debt-deflation. There would be no further risk of large sovereign defaults.
Mr Soros said — as he has many times before — that the current course is pushing euroland into a "lasting depression, and it is entirely self-created".
Indeed. "Entirely self-created". Repeat that a hundred times. There is nothing seriously wrong with Europe's underlying economy. It has magnificent companies, great creative skills, a global current account surplus and relatively low debt. (That is not a misprint. Europe does not have a debt crisis. It has a political crisis. It is so badly structured and so badly run that moderate debt has been allowed to mushroom into a crisis).
Mr Soros says there is now a "real danger" that the euro will destroy the European Union. One way to escape this is for Germany to "play the role of the benevolent hegemon", and accept debt-pooling.
If it is not prepared to undertake the leadership role that America played after the Second World War with the Marshall Plan, it should "step out" of EMU and let the others recover.
This may ultimately happen once German citizens realise what is being done to them by their elites, but the crisis could drag on for a very long time before that happens.
The alternative is slow crucifixion of Southern Europe — with depression in Greece, Portugal, Spain, and perhaps Italy continuing into 2013 and then again into 2014 — that finally leads to political rupture (as Italy’s Mario Monti has warned). This would be the worst possible outcome, yet it is the current default setting of EMU policy.
Unfortunately, there seems to be no way to halt this Bataan Death March. What Europe needs — to save it from itself — is a latter day George Soros with a happy band of very well-armed Musketeers.
It was Soros and allied hedge funds who liberated Britain from the self-inflicted stupidity of the Exchange Rate Mechanism in 1992 (though only after the Bundesbank gave them a green light by calling sterling and the lira overvalued).
If Soros had not forced the issue with a entirely benign and positive attack on the ERM peg, the British government would have carried on with mulish determination into the swamps of a monetary Passchendaele for months.
Many more people would have lost their jobs. Many more firms would have gone bust. The damage would have been even greater.
Soros liberated the British from a misguided government. True, it is not a good habit to rely on hedge funds to rescue countries from their own elected leaders, but it was fortuitous on that occasion.
The difficulty now is that EMU is harder to liberate. The fortifications are thicker and higher. The hedge funds lack the troops and artillery to storm the citadel, and there lies the problem.
An infernal edifice has been created than can defy market forces long enough to break whole societies on the wheel.
This time citizens can expect no Soros Salvation Army. They themselves will have to rise up in revolt within the fortress. That makes the whole saga much more dangerous.