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George Soros Has A Plan For The Euro

George Soros describes how the euro can be saved in today’s FT:

1. Reform and recapitalisation of the banking system…Banks’ equity capital levels need to be greatly increased. If an agency is to guarantee banks’ solvency, it must oversee them too. A powerful European banking agency could end the incestuous relationship between banks and regulators, while interfering much less with nations’ sovereignty than dictating their fiscal policies.

2. A Eurobond regime…Deficit countries must be allowed to refinance their debt on the same terms as surplus countries. This is best accomplished through eurobonds, which would be jointly guaranteed by all the member states.

3. An exit mechanism…It might be possible to devise an orderly exit for a small country like Greece that would not be applicable to a large one like Italy. In the absence of an orderly exit, the regime would have to carry sanctions from which there is no escape – something like a European finance ministry that has political as well as financial legitimacy. That could emerge only from a profound rethinking of the euro that is so badly needed (particularly in Germany).

It is always interesting to see what George thinks should happen, but he’s made his billions analyzing what will happen and I’ve met fewer people better able to separate their sentiment from their judgment.

So what I’m wondering is where Mr. Soros has his money.  Does he really think global financial leaders have what it takes to implement these reforms? Or is he betting against them, like many others who think that our financial leaders will fail?

Reading his prescription, the odds seem against the Europeans getting those three steps done in time.

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  • Jim.

    “So what I’m wondering is where Mr. Soros has his money.”

    So is everyone else. He’s discontinued making financial decisions for anyone but family members. Some cast this as “retirement”. Or, it could be pre-empting a, well, *reflexive* panic based on his actual moves.

  • WigWag

    It’s surprising that Mr. Soros has time to write articles these days for the Financial Times or anyone else. [information about Mr. Soros’ personal affairs irrelevant to the ideas under discussion omitted. ed]

    Now that Soros is shorting Brazil, I wonder where he will go long.

  • Luke Lea

    through eurobonds, which would be jointly guaranteed by all the member states. Ah, there’s the rub.

  • Alan Kellogg

    I know that “FT” stands for “Financial Times”, but would Soros be any more believable if it stood for “Fortean Times”?

    • Walter Russell Mead

      Soros has been much more accurate than most people at predicting world economic events. I often disagree with his policy recommendations and his political ideas, but I’ve learned to respect his ability to read what markets are telling us.

  • Toni

    Does any good ever come from denying reality?

    When Greece was first found to be in serious violation of the euro monetary union requirements — i.e., its deficit-to-GDP ratio was ~10% over the treaty limit — I never understood why it wasn’t expelled from the eurozone.

    Or voluntarily left, and went back to the drachma and inflating and budget-cutting its way back to fiscal health, as it had historically. Let bondholders suffer, either a decline in their returns or outright default.

    Investors take risks, and sometimes they make bad bets. Why should more prudent countries’ taxpayers bail out private bondholders who made bad investments? And if some of those bondholders are French banks, so be it. The banks hold bad investments; getting them off the books and shoring up capital — as the US did with the 1980s S&L crisis — is the best and fastest way to purge the banking system.

    Anything you subsidize, you get more of. Bailing out Greece’s bondholders leads to bailing out bondholders of every profligate country in Europe.

    Of course, acknowledging how worthless the bonds are is way too simple. It would require investors to admit and live with their mistakes, like we of the hoi polloi do. God forbid that rich European banks should have to write their assets down to their true value. WAY too simple.

    So Europe goes on searching for way to deny reality for a little longer.

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