Articles & Essays
Interview with George Soros: Angela Merkel is Leading Europe in the Wrong Direction
SPIEGEL: German Chancellor Angela Merkel is praised globally as "Mrs. Europe" and popular at home - partly thanks to her strong refusal to pledge more German money to the Euro rescue effort. You, however, are highly critical of Merkel's leadership. Why?
SOROS: I admire Chancellor Merkel for her leadership qualities, but she is leading Europe in the wrong direction. To solve the Euro crisis, I advocate a two-phase policy, which is first austerity and structural reforms as Germany implemented them in 2005, but then also a stimulus program. If you do not provide more stimulus in Europe, you will push many European countries into a deflationary debt spiral. And that would be extremely dangerous.
SPIEGEL: Are you saying the current austerity guidelines are too much to bear for poorer member states of the EU?
SOROS: It creates a vicious circle. The deficit countries have to improve their competitive position vis-a-vis Germany so they will have to cut their budget deficits and reduce wages and in a weak economy profit margins will also be under pressure. This will reduce tax revenues and require further austerity measures creating a vicious circle. Markets do not correct their own excesses. Either there is too much demand or too little. This is what the economist John Maynard Keynes explained to the world, except that he is not listened to by some people in Germany. But Keynes explained it very well - when there is a deficiency of demand, you have to use public policy to stimulate the economy.
SPIEGEL: Expensive stimulus programs, among other expenditures, have ruined the US balance sheet. Who is going to pay for another stimulus program in Europe?
SOROS: No country will be in a position to do it, because Germany has a constitutional requirement to balance its budget, and the other countries have to improve their position vis-a-vis Germany, so they will have to do even more saving than the Germans. The stimulus has to be a European stimulus.
SPIEGEL: Which, as many Germans fear, would largely be financed by Berlin. Germans feel they adhered to the rules the Eurozone agreed on, and the other countries did not. So why should we now provide more money to get the economies of such violators of EU treaties going again?
SOROS: This is a very righteous position taken by Berlin. But it is not exactly correct, because Germany was among the first countries to break the rules of the Eurozone.
SPIEGEL: Are you serious? Germany violated the rules for budget deficits a few times, while Greece has systematically lied about its balance sheet. That is hardly comparable.
SOROS: I am not going to make any excuses for Greece but the Germans were not exactly innocent in devising the rules. In fact, they were the main architects of the euro and its design was very flawed indeed. It assumed for instance that only the public sector produces imbalances but in many countries, the imbalances came not from the public sector but from the private sector. The creation of the euro generated a big real estate boom in countries like Spain, and it was the real estate boom that created the imbalances. When the euro was introduced the government bond of all the member countries were declared to be riskless and the European Central Bank (ECB) accepted them at its discount window on equal terms. Therefore, the banks did not have to reserve their own capital for holding government bonds. That is what induced the German and French banks to rush and buy Italian and Spanish bonds, because they yielded more than theirs.. And do not forget: these ECB rules were inspired by the German Bundesbank.
SPIEGEL: Should we really spend even more money if we can not be truly convinced that Greece, Spain, Italy will engage in structural reforms?
SOROS: Let’s distinguish between Greece and the rest of Europe. Greece is a special case. where everything that could have gone wrong did. The Greeks atrociously abused the advantages of EU membership. When Papandreou was elected with a reform agenda and revealed the abuses of the previous government he had to pay interest at penalty rates in order for Greece to be rescued. He did his best but it was not good enough and the political dynamics have been deteriorating ever since. Powerful business groups want to pay their tax arrears in drachmas not in euros and they own many newspapers. The choice for Germany is between continued subsidies or taking a one-time loss.
The rest of Europe behaved much better. Spain, for instance, ended the real estate boom with a lower debt ratio than Germany and also a better supervised banking system than Germany. Now it is following an austerity program almost masochistically. It is for Germany to recognize that austerity and structural reform may be necessary but not sufficient. Some economic stimulus is also necessary.
SPIEGEL: Why should suffering EU countries be inclined to reform their economies if they can count on another stimulus?
SOROS: Because they recognize that structural reforms are necessary even if they are not sufficient.
SPIEGEL: But are they not only doing so because of the high interest rates and market pressure? We have seen last summer what happens if you take away that pressure: As soon as the ECB announced it was buying Italian bonds, then-Italian prime minister Silvio Berlusconi said: "Okay, fine, let us stop reforms."
SOROS: Well, you now have Mario Monti in charge rather Berlusconi and he should be treated differently. Punitive interest rates could push Italy into the Greek trajectory.
SPIEGEL: Was not the abundance of „cheap money“ at the core of the last financial crisis? Would we not repeat the same mistake if we pledged billions of fresh money to countries in crisis?
SOROS: No. The mistake is not in providing stimulus at a time of insufficient demand, it is not turning off the faucet when the economy has recovered.
SPIEGEL: You and many other Americans are arguing for a bigger firewall to the crisis to Greece and to improve the situation in Spain and Italy. Would it not be a good idea then for America to increase its contribution to the IMF?
SOROS: There should be no need to have the IMF come in. It is only a policy failure on the part of Europe and particularly of Germany, because Germany is in charge. Europe as a whole is in external balance and should be able to solve its own internal problems.
SPIEGEL: You repeatedly pushed for the introduction of Eurobonds. German finance minister Wolfgang Schäuble responded: „Euro bonds give the wrong incentives because you spend money you do not have on the bills of others“.
SOROS: Schäuble does not seem to understand that the heavily indebted countries are now at a severe disadvantage, because they have basically become heavily indebted in a foreign currency, in the Euro. They do not control it, and so they are in the same position as third world countries in Latin America were in at the beginning of the 1980s - a situation which led to a lost decade there. Europe now faces a lost decade. The situation in the European Union, though, is much worse than it was in Latin America, because the European Union is a political union. The political tensions over the Euro could eventually destroy the EU. That is the reason we need Eurobonds and a new EU fiscal compact to ensure political stability.
SPIEGEL: The EU has had a fiscal compact before, and the rules were just not followed. Why should this now be different?
SOROS: In the past, there was no enforcement mechanism. Now if you introduce eurobonds, so that the bulk of the financing would be on equal terms between Spain and Germany, then if Spain wanted to borrow additional amounts, they would have to be borrowed by Spain using its own credit, which would be extremely expensive because there would be a sharp penalty. Effectively, creating eurobonds would create the mechanism for controlling the amount of borrowing by each individual country.
SPIEGEL: But German politicians are hell-bent on preventing Eurobonds.
SOROS: That is no longer true. Certainly, former German finance minister Peer Steinbrück used to say: „Eurobonds? No way.“ Today, SPD heavyweight Frank-Walter Steinmeier says like me that what Chancellor Merkel is proposing in response to the Euro crisis is necessary but is not sufficient.
SPIEGEL: Steinmeier is not in power.
SOROS: But he could be. The point I want to make is that opposition to Eurobonds can no longer be described as the German position. It happens to be the position of this specific government at this moment in time.
SPIEGEL: Given financial history over the past 10 years, one could make the point that no one can truly predict the markets - certainly not Wall Street gurus that caused the last financial crisis. So what makes you so sure your economic strategy is working and Angela Merkel is wrong?
SOROS: Because I am not predicting the future I am observing the present. Just look at Spain: They implemented all the economic measures Merkel wants to prescribe: And they depressed their economy, their debt burden got bigger instead of smaller. So they will have to increase austerity, which will create another hole. And this is true in other countries as well. It is a vicious cycle, there is already evidence.
SPIEGEL: Counter-example: Ireland. Through sharp austerity, its economic situation has increased considerably.
SOROS: You forget to mention that Ireland is getting relief at a much lower interest rate than it would have to pay in the market. IF it had to pay market interest rates, Ireland would be in a worse situation than Spain. That proves my point that punitive interest rates are exactly the wrong medicine.
SPIEGEL: With regard to Greece, there is no wrong or right way. Put simply, the country is beyond rescue.
SOROS: Europe soon will need to pump another 90 billion dollars into Greece to prevent an immediate default. I expect that the money will be put up because Europe has not yet properly prepared for a Greek default. A disorderly default could cause so much harm that it may be better to pay the money now and allow a default to occur later.
SPIEGEL: What a great prospect: Why should we now spend so much money on a country that is bound to go under?
SOROS: I would have hoped that by now, Europe would have sufficiently ring-fenced the rest of the eurozone so that it could let Greece go. Unfortunately, that may not be the case.
SPIEGEL: There would be a contagious effect all over Europe in the case of a Greek default?
SOROS: The governments of Italy and Spain can probably be ring-fenced, because of the LTRO financing that was provided by the ECB. But I am worried about the banks and the bank deposits. If Greek depositors lose money, you may not be able to prevent a flight from Italian and Spanish banks - which could lead to the ultimate break-up of the euro.
SPIEGEL: The US, always prone to dole out advice to Europeans, is not exactly in good shape either. The Occupy Wall Street movement has put growing social inequality on the agenda in America. What do you think of the movement as a world-famous investor with an estimated fortune of more than 14 billion dollars?
SOROS: I have sympathy with their anger, because they are victims. Financial investors in Wall Street investment banks got the benefit when the banks made a profit. But whenever they lost a lot of money, the state was forced to take over the losses. That was very unfair, and the people who carried the loss-- because they lost their jobs or had to pay more taxes--have a very legitimate complaint.
SPIEGEL: The members of the movement want the rich, the 1 percent, to pay higher taxes. Do you agree?
SOROS: I do. And I do not support the Republicans who want to save me from paying taxes.
SPIEGEL: What is your tax rate?
SOROS: My tax effective rate is relatively low but only because every year I contribute at least the maximum 50 percent of my income to my foundation.
SPIEGEL: If you support the idea of higher taxes and somewhat more government, why do you not just pay more taxes instead of giving it to your foundation?
SOROS: Because I think that my foundation uses the money better than the government does. In any event I do pay taxes
SPIEGEL: You are basically saying that you are smarter than the government.
SOROS: Well, I have greater freedom of action than a bureaucracy. I also care more about the causes to which I contribute. So my foundation can set an example, in its philanthropic activities, for the government to follow.
SPIEGEL: That makes it harder for you to tell other rich people, "Pay more taxes."
SOROS: If every rich person gave 50 percent of their wealth to charity, I would not say they should pay more taxes.
SPIEGEL: You are a lifelong Democrat but recently said there is not much of a difference between the likely Republican presidential candidate Mitt Romney and Barack Obama. Did you mean that seriously?
SOROS: Only a small part of my answer was quoted. There is a difference between the people who each would bring into the government and the kind of judges they would nominate. Even so, I neglected some important differences between them. For example, Obama would insist on higher taxes than Romney. That is why my fellow hedge funds owners support Romney and not Obama.
SPIEGEL: They also might like him because he proudly runs on his record as a business man. In this time of social tensions, should a venture capitalist become the next US president?
SOROS: I do not think that it should disqualify him, but, at the same time, it isn’t a particular qualification. Romney claims to know how to create jobs - but as a private equity investor he probably destroyed more jobs than he created, because he wanted to maximize profits.
SPIEGEL: Are you going to fight Romney and support President Barack Obama with millions of dollars as you did in his last campaign?
SOROS: I do not intend to make contributions on that scale.
SPIEGEL: Are you so disappointed with Obama?
SOROS: Disillusioned is a better word. I had expected more transformational leadership. But the problems he confronted were probably bigger than any President could have dealt with and, he is more of a follower than a leader - much less so than Angela Merkel, for example.
Unfortunately, she is leading in the wrong direction. That is why I am trying to change her mind. I still believe Germans are open to arguments.
SPIEGEL: How can you as one of the world's most influential investors with such wide-ranging interests all around the globe give impartial advice to world leaders on the financial crisis?
SOROS: Look, I can understand all the suspicions, and I think it is a legitimate question. However, I have made it a principle to give advice which does not serve my personal interest but the common interests. I think the record is clear on that point.
SPIEGEL: But you push for lower interest rates or access to 'cheap money', for instance. Both steps would help you as an investor.
SOROS: That is true. But it would also help all other investors and it would help to preserve the global financial system. In that sense, I am concerned with my own interests. I think that I perhaps understand the financial system better than some of the people who are in charge. So, as a citizen, I feel justified in trying to give advice. I am not arguing for the policies I support to make a profit. I make it a principle in my advocacy to put the public good before my private interests. For example, I support Obama’s proposal for higher taxes on the rich.
SPIEGEL: Mr. Soros, we thank you for this interview.
Source: Der Spiegel