By George Soros
Like it or not, Berlin leads the eurozone. Now it must decide the future of the currency area – and the sooner the better
Hans-Werner Sinn has deliberately distorted and obfuscated my argument. I was arguing that the current state of integration within the eurozone is inadequate: the euro will work only if the bulk of the national debts are financed by eurobonds and the banking system is regulated by institutions that create a level playing field within the eurozone.
Allowing the bulk of outstanding national debts to be converted into eurobonds would work wonders. It would greatly facilitate the creation of an effective banking union, and it would allow member states to undertake their own structural reforms in a more benign environment. Countries that fail to implement the necessary reforms would become permanent pockets of poverty and dependency, much like Italy’s Mezzogiorno region today.
If Germany and other creditor countries are unwilling to accept the contingent liabilities that eurobonds entail, as they are today, they should step aside, leave the euro by amicable agreement, and allow the rest of the eurozone to issue eurobonds. The bonds would compare favourably with the government bonds of countries like the United States, the United Kingdom, and Japan, because the euro would depreciate, the shrunken eurozone would become competitive even with Germany, and its debt burden would fall as its economy grew.
But Germany would be ill-advised to leave the euro. The liabilities that it would incur by agreeing to eurobonds are contingent on a default – the probability of which would be eliminated by the introduction of eurobonds. Germany would actually benefit from the so-called periphery countries’ recovery. By contrast, were Germany to leave the eurozone, it would suffer from an overvalued currency and from losses on its euro-denominated assets.
Whether Germany agrees to eurobonds or leaves the euro, either choice would be infinitely preferable to the current state of affairs. The current arrangements allow Germany to pursue its narrowly conceived national interests but are pushing the eurozone as a whole into a long-lasting depression that will affect Germany as well.
Germany is advocating a reduction in budget deficits while pursuing an orthodox monetary policy whose sole objective is to control inflation. This causes GDPs to fall and debt ratios to rise, hurting the heavily indebted countries that pay high risk premiums more than it does countries with better credit ratings, because it renders the former countries’ debt unsustainable.
From time to time, they need to be rescued; and Germany always does what it must – but only that, and no more – to save the euro. As soon as the crisis abates, German leaders start to whittle down the promises they have made. So the austerity policy championed by Germany perpetuates the crisis that puts Germany in charge of policy.
Japan has adhered to the monetary doctrine advocated by Germany, and it has experienced 25 years of stagnation, despite engaging in occasional fiscal stimulus. It has now changed sides and embraced quantitative easing on an unprecedented scale. Europe is entering on a course from which Japan is desperate to escape. And, while Japan is a country with a long, unified history, and thus could survive a quarter-century of stagnation, the European Union is an incomplete association of sovereign states that is unlikely to withstand a similar experience.
There is no escaping the conclusion that current policies are ill conceived. They do not even serve Germany’s narrow national self-interest, because the results are politically and humanly intolerable; eventually, they will not be tolerated. There is a real danger that the euro will destroy the EU and leave Europe seething with resentments and unsettled claims. The danger may not be imminent; but the later it happens, the worse the consequences. That is not in Germany’s interest.
Sinn sidesteps this argument by claiming that there is no legal basis for compelling Germany to choose between agreeing to eurobonds or leaving the euro. He suggests that, if anybody ought to leave the euro, it is the Mediterranean countries, which should devalue their currencies. That is a recipe for disaster. They would have to default on their debts, precipitating global financial turmoil that may be beyond the capacity of authorities to contain.
The heavily indebted countries must channel their citizens’ rising discontent into a more constructive channel by coming together and calling on Germany to make the choice. The newly formed Italian government is well placed to lead such an effort. As I have shown, Italy would be infinitely better off, whatever Germany were to decide. And if Germany failed to respond, it would have to bear the responsibility for the consequences.
I am sure that Germany does not want to be responsible for the EU’s collapse. It did not seek to dominate Europe, and is unwilling to accept the responsibilities and contingent liabilities that go with such a position. That is one of the reasons for the current crisis. Yet Germany has been thrust into a position of leadership. Europe would benefit from a benevolent hegemonic power. So would Germany.