Be Careful with Euro! – Interview with George Soros

Angela Merkel’s austerity model failed in Europe says one of the most influential and most successful investors of all time George Soros.
In the interview, he states that the debtor countries of the Eurozone are in rebellion against the German austerity policy and will successfully throw off their shackles of it. However, the Germans – including politicians, financial and economic decision makers – are opposed to a new policy as they fear that they will have to bear the costs of it.

This suggests a serious conflict between the debtor and creditor countries.
George Soros, nevertheless, supports Italian President Matteo Renzi’s idea about issuing Eurobonds in any form that would be jointly guaranteed by the European countries.
He talks about Russia and its nationalist form of governance as a crucial problem of Europe. In the eyes of the public, the Russian model is considered to be more successful than the democratic but bureaucratic and wastefully governed European Union which is based on the rule of law.

Zentai Péter: You have just been to Ukraine, where you met President Poroshenko. What conclusion could you draw from the visit? Why are you so concerned about Ukraine?

George Soros: Russia poses an existential challenge to the European Union and to the current global governance. The European Union is a form of international governance which is based on the rule of law. Russia, however, is a new form of governance. Actually, it is not really so new; it is more like a revival of old examples, like regimes in the interwar period. Today’s Russia recalls the fascist regime. The international ideology of Soviet Union has been replaced by nationalism based on religion – the importance of the Orthodox Church – and on ethnicity – the importance of the “Holy Russia”.

Why does this threaten the Western world, the European Union?

The Western model is based on respecting the law; this is determining its internal and external actions. In contrast, Russia believes in the use of power, including military power, and has no hesitation in violating law and international agreements if it is in its interest. Invading and annexing Crimea clearly prove this.

Do you think that Russia is an imperialist state that tries to expand?

Of course, Putin cannot be compared to Hitler who was trying to conquer the whole world.

Do you perceive Putin as a threat because his actions could have a contagion effect on other countries, because others could copy the Russian model?

That is definitely the case: it is already spreading. Russia’s annexation of Crimea encouraged China to extend its boundaries on the South China Sea and start digging for oil in Vietnamese waters in violation of international agreements.

These regimes are able to use power and arbitrarily rewrite the rules because they consider that the other side – the democratic system, the West – is too weak.

That is right. Both the European Union and the United States are caught up in their internal problems. Europe is dealing with the euro crisis and its consequences, which are already political conflicts, while America is paralyzed by infighting between the Democratic Party and the Republicans.  There is a general reluctance in the Western societies to get involved in military adventures. That is the outcome of President George W. Bush’s involvement on a number of wars in the Middle East. The public got really tired of wars and international engagement and fell into the other extreme: inward-looking.
The United States is still by far the most powerful military force but is not willing to intervene on this basis. President Obama would not use military force anymore to protect the Western regime.

So you are not supporting Obama anymore?

I think he has come too far in withdrawing in contrast to Bush’s politics. As being a democratic politician, he is reflecting the mood of the nation and tries to meet the society’s expectations.

You have mentioned that you considered the euro crisis as a political conflict. Would you explain that?

The euro survived and it will survive for good. Two years ago, the future of the euro was very much in doubt. Now, the financial crisis around the euro is over because the European Central Bank with the support of Angela Merkel has done whatever was necessary to preserve the currency.

I remember that two years ago, you were very critical about Angela Merkel regarding the euro, saying that she was doing way too little for saving it or doing the wrong thing… And yet, here we are and the euro is alive.

The euro is alive but it took quite a toll on politics. The rules which governed the euro seriously aggravated the political conflicts and created a political crisis. The disadvantages from which the debtor states suffer were perpetuates. Although the economy has stopped declining, the economic growth is still very modest. Germany and the creditor countries are moving ahead whereas some of the debtor countries are still falling. So the difference between debtors and creditors is getting wider, which is creating internal and international political tensions.

At the same time, the policy of austerity introduced under German influence throughout the Eurozone is under serious attack. Now it seems that the European countries will stop following Merkel’s diktat and the anti-austerity plan of Italian Prime Minister Matteo Renzi will prevail. This, however, may go down badly with the German public as they fear that again they will be the ones who have to finance the spending of the South. They feel that they are under the threat of inflation, whereas the real threat confronting the European Union and, in particular, the Eurozone is deflation.

What should be done in this situation?

The problem is absolutely recognized by the European Central Bank. I am not alone saying that. Nevertheless, some decision makers, particularly, the German central bank (Bundesbank) and the German leaders are very unhappy about abandoning the discipline of fiscal austerity.

Would you suggest a short-term “firefighting” to quickly ease the pain or putting up with more suffering in order to be cured of all illness and every wound and ensure that the disease never recrudesces again?

I have been very vocal about saying that the austerity is not the right policy at the present time. When there is a deficiency of demand and the existing productive resources are not properly utilized, there is something wrong. The indebtedness cannot be reduced by retrenching because the Gross Domestic Product would shrink further.
In such a situation, priority should be given to increasing the GDP, resulting in the reduction of debt.

That is the reason why the ECB is flooding the economy with money: it accelerates the growth of GDP by zero interest rate (cheap money) and by other means. What you are saying is happening now.

The interest rate cannot go lower than zero, though it can grow a little into negative territory. Once the interest rate has fallen to zero, the European Central Bank has to use quantitative easing, buy government bonds and/or corporate bonds. The ECB has started that now. That is right.
But this is not enough. You also need fiscal stimulus throughout Europe – at least throughout the Eurozone. That is where Renzi comes in.
He is not proposing issuing Eurobonds but issuing European project bonds. I had been advocating Eurobonds (the bonds are guaranteed by all of the member states) but ran into total opposition from Angela Merkel. The chancellor said: “No Eurobonds in my lifetime”. Renzi, now, seems to have found another name for it, and – for the moment – I have not heard any objections to it from the Germans. This new mechanism would finance European investment in European investment projects, specifically, high-speed internet, energy (smart electric grid for picking up production of wind energy and solar energy), and a gas pipeline that would reduce the excessive dependence on Russian transported gas. The bonds needed to finance these investments would be issued by the European Investment Bank.  These projects would be sufficient to produce enough income to contribute to the accelerated growth of the GDP, to use the existing productive capacity more efficiently, and employ more people. In this way, consumption would expand and the national debt would be reduced. Eventually, the process would become self-financing.

And you support Renzi’s solution, I believe?

Absolutely. Once again, my understanding is that Angela Merkel did not say no to the project bonds. She is more willing to consider it because it is now obvious that her policy of austerity has failed.  Of course, she will never admit that publicly. She is agreeing to the project bonds, which in effect, are the same as Eurobonds. The project bonds would be as well financed by the ECB… The European Investment Bank (EIB) would issue them, while the ECB would buy them.

I can see that you are satisfied with this development. What else could be done in order to avoid deflation?

Deflation is the real danger in Europe. The danger can be defused for a time but deflation will still be there.
In fact, inflation should occur. But since Germany had the traumatic experience of inflation, they are afraid that the quantitative easing could, eventually, produce inflation. That is the reason why they were so strongly against introducing quantitative measures and why we are exposed to the risk of deflation.

And in the United States?

In the United States, quantitative easing has helped to generate growth and to control inflation. Now, the FED is starting to wind it down, reduce the amount of bonds they buy, and maybe, in a not too distant future, increase interest rates. Then we would return to normality.

Right now, however, there are zero interest rates in the United States and the Western world. What trends of prices do the stock markets show? Do you think they are realistic? How can you know that a stock or any other asset is cheap or expensive?

You have to realize that inflation manifests itself in consumer prices. Asset prices (stocks, bonds, real estate etc.) are another thing. This orthodox view has to be revised and these new connections have to be recognized. The real danger is that huge asset bubbles are generated, which needs to be controlled by non-conventional means – not by controlling interest rates but by increasing the amount of reserves banks have to keep. The commercial banks need to be controlled and monitored closed because it is not only the Treasury and the Central Bank that create money, but also the commercial banks by lending.