With every post on the Deep End, we aim to feature the most interesting articles the internet has to offer. But occasionally, we come across a piece so full of ideas and insight that one post is not enough to do it justice.
Thus for the next three days the Deep End is devoted to George Soros’s hugely important essay on the Eurozone for the New York Review of Books, which is essential reading both for what it gets right and what it gets wrong.
Though a self-described "fervent supporter of the European Union", Soros is not blind to fatal flaws of the Eurozone:
- "By transferring what had previously been their right to print money to the European Central Bank, the member states exposed their sovereign credit to the risk of default. Developed countries that control their own currency have no reason to default; they can always print money. Their currency may depreciate in value, but the risk of default is practically nonexistent. By contrast, less developed countries that borrow in a foreign currency have to pay premiums that reflect the risk of default."
Though Soros describes this flaw as "hidden" (up until the credit crunch), it was – to the early critics of the single currency – always there in plain sight. Nevertheless, for a long time, the money markets chose not to see it, which is why countries like Greece, Spain and Italy were able to run up huge debts at low interest rates. Once the penny dropped and borrowing costs went through the roof, the same countries found themselves facing a crisis of solvency.
Soros argues that all members of the Eurozone, including Germany, share responsibility for this state of affairs. He also points out that the Eurozone as a whole has the resources required to resolve the crisis. So why does Germany refuse to do more than the bare minimum required to stave-off immediate collapse? Soros makes an intriguing observation:
- "In this context the German word Schuld is revealing: it means both debt and guilt. German public opinion blames the heavily indebted countries for their misfortune."
Thus for a German-speaker a heavily indebted individual or nation is also a deeply guilty one. Even in English, debt is often used as a metaphor for guilt. And yet the two concepts actually work in very different ways. For instance, there is no necessary correspondence between guilt and innocence – i.e. for someone to be guilty of something does not require someone else to correspondingly innocent of it. But when it comes to debt, there has to be a corresponding level of lending for any given amount of borrowing. Furthermore, irresponsible borrowing on the part of a debtor usually implies irresponsible lending – or at least carelessness – on the part of a creditor.
So, rather than being an unfortunate pairing of the guilty and the innocent, the Eurozone is a debtor-creditor relationship, the responsibility for which is shared. Arguing over which side is more to blame is irrelevant as the problem only exists as a result of the freely entered into relationship, not in spite of it.
Soros has added an update to the online version of his essay. Noting events taking place subsequent to print publication, he explains that Germany has made a crucial concession. The European Central Bank is now free to "do whatever it takes to preserve the euro as a stable currency". In practical terms this means "unlimited purchases of the government bonds of debtor countries."
Justly, he describes this as a "game-changing event," but one that will extend the crisis, not resolve it. Rather, the "Euro crisis has entered a new phase" – of which, more tomorrow.