The Resistible Fall of Europe: An Interview with George Soros

George Soros is Chairman of Soros Fund Management and Chairman of the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of many books, including The Alchemy of Finance and The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means.

The Resistible Fall of Europe: An Interview with George Soros

14 May 2013

Editor’s note: On May 12, George Soros was awarded the Tiziano Terzani Prize for his 2012 book Financial Turmoilpublished in Italy by Hoepli. The following interview is adapted from a press conference held in Udine, Italy, on that occasion.

SOROS: I have been very concerned about Europe. The euro is in the process of destroying the European Union. To some extent, this has already happened, in the sense that the EU was meant to be a voluntary association of equal states. The crisis has turned it into something that is radically different: a relationship between creditors and debtors. And, in a financial crisis, the creditors are in charge. It is no longer a relationship between equals. The fate of Italy, for example, is no longer determined by Italian politics – which is in a crisis of its own, I would say – but rather by the creditor/debtor relationship. That is really what dictates policies.

QUESTION: But the stock markets are apparently in good condition. Why do you think we are in a crisis? Do you think this kind of honeymoon will go on for a long time?

SOROS: The answer is no. We are in what I call a far-from-equilibrium situation. Therefore, it cannot last. But I am not in a position to predict the future.QUESTION: The spread between German treasury bonds and Italian treasury bonds has decreased despite the current financial difficulty. Do you think this could delay the introduction of Eurobonds – which, if I am correct, you support – as a possible solution to remedy the current discrepancies among rates in Europe.

SOROS: Yes, I think it could, because this could continue, and the discrepancy in the rates would not disappear, though it would remain within a range that could be tolerated for an indefinite period. Of course, it would be a big handicap for Italy, making it more difficult to escape the disadvantageous position it is currently in.

QUESTION: The lack of access to credit on equal terms creates an uneven playing field. This is a handicap for different countries and makes it more difficult for them to regain competitiveness. What should be done?

SOROS: It is important to recognize that this disadvantage consists of two components. One is the cost of borrowing by the government, and the other is the cost of borrowing by the private sector. Recently, since the Cyprus rescue, the private sector’s disadvantage, particularly for small and medium-size enterprises (SMEs), increased to crisis proportions. Fortunately, the authorities recognize this. The European Central Bank is discussing the possibility of using its resources to help resolve this problem. And it is very, very important what they come up with. I am hopeful that they will produce a scheme that could make a difference. If you could package the loans to SMEs and refinance them at the ECB on equal terms, that would mean that enterprises south of the Alps would be able to borrow on more or less equal terms with enterprises north of the Alps. That would be a game-changer.

I am sure that this will be resisted on legal grounds. I am not in a position to follow the battle within the ECB from the outside, but what the outcome will have a major influence on the future course of events.

It should not escape your attention that if the ECB succeeded in making credit available on equal terms, it would effectively mean a large-scale mutualization of rather risky debts. Once that happened, it would make sense to mutualize government debts as well. Guarantees have a peculiar feature: the more comprehensive and convincing they are, the less likely they are to be invoked and to result in losses. So the securitization of SME loans could be an indirect route to Eurobonds. It would certainly be a step in that direction. That is why it is bound to be resisted. But success could lead to a positive resolution of the euro crisis.

QUESTION: Do you think Germany could ever accept the idea of debt mutualization by the ECB? I am sure that there must be severe resistance to this idea in some circles in Germany. Can they prevent it?

SOROS: The ECB is a functioning institution. So long as it acts within its powers, Germany is not in a position to veto it. This is why I am hopeful that something really significant might come out of the deliberations currently taking place behind closed doors.

QUESTION: Do you think the current economic crisis is possibly the final step in a general philosophical crisis in the West?

SOROS: I discussed this in 2000, in my book on The Crisis of Global Capitalism. So far, global capitalism is surviving, but with great difficulty. I hope it will continue to do so, but with less difficulty. I don’t think there is a viable alternative to global capitalism, but it does need better institutions.

QUESTION: Europe is still in deep recession. What are we doing wrong? What is it that we can learn from the United States to overcome the crisis?

SOROS: First of all, the euro crisis is a direct consequence of the financial crisis that started in the US in 2007. And it has to do with the design of the eurozone, which is fundamentally flawed. The global financial crisis revealed some of those flaws, though some are not properly recognized even today. So the US is, in fact, doing better. Europe now has to solve its own crisis, which is, of course, a combination of a financial crisis and a political crisis.

QUESTION: Some people have said that speculators such as yourself helped cause these crises to some extent. How do you react to this criticism?

SOROS: I am not surprised. And I am ready to answer any concrete criticisms that may be raised. I have always been very open about my activities. Financial crises are not caused by speculators, but by the authorities, which create or establish the wrong rules that allow speculators to do what people blame them for. In other words, to put it more clearly, speculators are messengers delivering bad news.

QUESTION: Looking back at what happened in 1992 with your Quantum Fund, which led to the devaluation of the Italian lira by 30%, what are you feelings today? Do you have any regrets?

SOROS: No, I have no regrets whatsoever. My actions have been discussed. At the time, I did take a position in the Italian lira, because I was listening to the Bundesbank talking about its unwillingness to provide funds to maintain the European exchange-rate mechanism – the ERM. So it was a good speculation. And I have no regrets whatsoever.

QUESTION: Did the Bundesbank give you hints about what it would do?

SOROS: These were public statements. I had no personal contact. I was only listening to what they were saying publicly.

QUESTION: Mario Draghi, the ECB’s president, has undertaken several initiatives. Last summer, he approved so-called outright monetary transactions (OMTs) in order to acquire an indefinite volume of distressed eurozone members’ bonds., which is contributing to the strength of the euro. He adopted other successful measures as well. Do you think the ECB could do more to solve crisis?

SOROS: The ECB has to act within its legal powers. And lawyers have been playing a key role in deciding what it can and cannot do. The lawyers probably have more influence than the economists in this regard. The ECB has been pushing the limits, but it must remain within them. And that is constitutionally correct, because, after all, its governing board is not elected by popular vote. The ECB is already carrying too much weight. There is a missing ingredient: a fiscal authority. For a fully functioning financial system, you need not only a monetary authority, but also a fiscal authority – a treasury. The US has a central bank and a treasury, and the two of them have dealt with the financial crisis. In Europe, there is only the central bank. The fiscal authority is missing. And everything would be much simpler and function better if a fiscal authority was actually constituted, which requires political action.

QUESTION: Unemployment is soaring in the countries on the EU’s periphery, affecting all age brackets. Do you think we should reverse course and tackle, first and foremost, the social crisis and the unemployment problem, rather than insisting on the financial aspects?

SOROS: The evidence is growing that austerity is not working. Sooner or later, I expect a reversal of the current fiscal policy – the sooner, the better. There is a political problem, namely that the creditors dictate economic policy. And there is a financial or an economic problem, namely that the policy the creditors advocate is counter-productive. The rest of the world, in the face of excessive unemployment, is no longer trying to reduce prematurely government debt accumulated during the financial crisis. And the rest of the world engages in quantitative easing. The latest convert is Japan, where the central bank has been forced to abandon its orthodox monetary policy. So I think it is only a matter of time. Something has to give in Europe, because Europe is out of touch, out of synch, with the rest of the world.

QUESTION: The impression in Europe is that we are going through a very far-reaching and deep crisis, possibly the last crisis, because Europe is losing ground against the Far East and South America. And it could really mean that we are losing our sovereignty. Do you think that Europe will be able to regain the economic and political strength to be a leader in the world, or is this really the end? Do you think that Europe will be a world leader again? Or do we have to prepare for a reversal of growth?

SOROS: I share your concern about the gravity of the crisis. I have taken it very seriously. As a believer in an open society, I have made it my first priority for the last few years. This book [Financial Turmoil] is a testament to my concern. I do not think that the euro crisis is the end of Europe. We must not allow it. The EU as it was originally conceived was the embodiment of the values and principles of an open society, and it had the potential to exercise a beneficial influence in the world in promoting those principles. It is a great loss for the world that the EU has become totally preoccupied with its own internal problems.

As you probably know, I have set up Open Society foundations, which are active all over the world. I have recently established an Open Society Initiative for Europe, because I believe that the euro crisis has endangered the principles of open society in Europe. Like all of my other foundations, it is guided by a board composed of people living where the foundation is active, and it has begun to function. The chairman of the board is Ivan Krastev of Bulgaria, and the executive director is Jordi Vaquer of Spain. And the offices are in Barcelona.

QUESTION: An open society as an excellent idea. I find it extremely interesting from a theoretical point of view. But, if you apply it to Italy, I mean, there are more and more critics of Europe because of its top-down approach, whereby the EU imposes regulations and rules on member countries – and especially on SMEs. And ordinary people have to abide by a growing number of European laws. Don’t you think that, to some extent, though not in a very evident way, Europe is an enemy of an open society?

SOROS: No. I think the EU, in its conception, is the embodiment of an open society. But the concept of open society is based on the recognition that our understanding of reality is always inherently imperfect. As a consequence, the treaties that are the basis of the EU are also imperfect. The authorities are trying to deal with the crisis according to these treaties, because they recognize that it is very difficult to change them. They are also afraid that public opinion has turned against European integration. So they do not dare to bring up a treaty change. And that is the tragedy of Europe. The authorities are effectively violating the principles of open society by looking for solutions within the confines of treaties that have proved to be inadequate. This has generated political dynamics that are leading toward the EU’s disintegration. People who consider the current conditions intolerable become anti-European. So we need some kind of political movement that recognizes that conditions are in fact intolerable, but that Europe’s problems require a European solution – a pro-European but anti-establishment political movement.

While each country has its own structural problems, the debtor countries suffer from a structural problem of the euro, which can be solved only by all the member countries cooperating in finding a European solution. The debtor countries are caught in a bind from which they can escape only through a European political process, not by each country trying to solve its problems on its own. If Italy tried to leave the euro, it would have to default on its debt, which would be catastrophic not only for Italy, but for all of Europe and even for the global financial system.

QUESTION: What is your approach to sustainable management of natural resources and safeguarding the environment? To what extent do you think it is crucial for the future of planet Earth.

SOROS: This is a subject that is very close to my heart. I think considerable progress is being made in dealing with the management of natural resources. I am particularly involved in Myanmar, where land-grabbing is a big problem. I think the government is responsive. They have the wrong kind of law on land ownership, because it is based on plantation agriculture, and what Myanmar needs is smallholder-based agriculture. But I think they are ready to move in this direction.

There are also discussions taking place in the United Nations about what should follow the Millennium Development Goals after the 2015 target date. I went to Bali, in Indonesia, to attend a meeting where this was discussed, and I argued that the next set of goals should revolve around social injustice. All of the remaining major areas of extreme poverty are associated with some form of discrimination, repression, or exclusion of the poor. So the legal empowerment of the poor has to be an important element of the next set of development goals. And I think this idea is gaining acceptance.

QUESTION: What do you think the Italian government should do at the moment. Obviously, they would like to do many things, but they are obliged to abide by the fiscal compact and the many other austerity measures.

SOROS: I said at the beginning that Italy is not in charge of its own destiny. And politics is no longer confined to individual countries. And I think it is very important for people to realize this and to take European politics more seriously and not be totally preoccupied with domestic politics. The elections next year for the European Parliament could be very important in developing European politics, because there is a plan to elect the next president of the European Commission through the European Parliament. The European Parliament has the authority to oppose any candidate. It is therefore in a position to insist that the European Council accept the candidate elected by the majority of MEPs. The two major parties, the Christian Democrats and the Social Democrats, have agreed to follow this course. So there is a very significant political battle shaping up. I hope that people in the various countries will realize this and take the European elections very seriously.

QUESTION: Would you invest in Italy at the moment?

SOROS: I am no longer active in making investments. My investment fund is now managed by a team that has full authority to make the decisions. And they don’t necessarily listen to me, even if I have an opinion.

QUESTION: What is the possible future for Italy? Do we have to think of something similar to Cyprus or not?

SOROS: I have a great deal of sympathy for Italy’s predicament. I wish I could offer some miraculous solution. Italy is in a bind. But I don’t think the situation is hopeless. With some changes in the structure of the euro, Italy could be a perfectly normal, functioning economy. It is not so far off, except for the very severe recession – imposed on Italy by the policies that it has been forced to follow. I don’t think that Italy is at all comparable to Cyprus. It’s apples and oranges. What is so frustrating about Italy is that it basically has quite a well-functioning economy, performing even better than Germany in many ways – except that people don’t pay taxes. So the Italians have been quite competitive and became rich – but the Italian state has a lot of debt, mostly owned by Italians. But Italy has some very serious political problems, which find expression in the way the parties function, pervasive corruption, and an electoral system that gives party leaders dictatorial powers over the electoral list. So there is a specific Italian political crisis, which has been aggravated by the euro crisis, in the same way that the euro has some specific structural flaws that were aggravated by the financial crisis in America. But I am not Italian and I don’t understand the intricacies; so I am not in a position to say much about it.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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