This is the first in a series of blogs on the Eurozone crisis. Thanks to Troy Warwick for the analyst coverage.
With a recent speech delivered in Italy earlier this month, investment mogul George Soros believes that the euro may still continue to survive. His prediction on Greek election results—that the Greeks would favor a pro-bailout coalition—proved to be correct yesterday, as Greece’s center-right New Democracy party succeeded in parliamentary elections. So how will the rest of Soros’ predictions hold for the euro and the euro-zone during the next three months?
According to Soros (left), the Greek crisis will reach its climax during the autumn, and this, paired with a weakening economy in Germany, constitutes his estimated three-month window for resolution. “[In the fall], the German economy will also be weakening so that Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities.”
Soros’ belief is that the euro crisis is fundamentally a problem of misguided leadership. He sees the crucial issue as a misinterpretation of events; authorities have confused the fiscal crisis in Greece with the banking crises in the rest of Europe. Most of the issues have arisen because authorities were simply trying to buy time: They “did not even understand the nature of the problem, let alone see a solution.” It is because of this that European leaders "applied the wrong remedy" and is what Soros believes to be the major factor in the euro crisis today.
Despite this three month period, Soros still believes that the euro will survive. A breakup of the euro would not only be negative for Germany, but for the periphery countries in the eurozone as well. With the Bundesbank sitting on over one trillion euros of claims from Target2, the euro clearing system, Soros states that “Germany is likely to do what is necessary to preserve the euro—but nothing more.” It is here that Soros hits on his main argument. Reverting back to the Deutschemark would hurt Germany more than continuing to support peripheral countries under the euro. Germany relies on the euro for cheap exports and the euro prevents other eurozone countries from defaulting on debts. Germany also stands to lose more than just financial stability. If the euro fails, Germany takes the blame for the downfall of the united European dream. Soros’ argument is apparent—the country cannot afford to let the euro fail.
This prediction has more reaching implications, however, as Soros states that Germany is likely to become an empirical force, with the eurozone transforming into “a German empire with the periphery as the hinterland.” The outcome would be a weaker South and stronger North Europe, with Spain, Italy and Greece borrowing an influx of payments from Germany.
Still, others predict that there will be smaller eurozone breakups in the next year, but with sufficient guiding measures provided by authorities. A messy and disorderly outcome, which is still a real possibility, is likely to be less dramatic than Lehman’s collapse, but will nonetheless be impactful.
Will the euro survive the coming months? It looks like its survival will be likely, but even Soros states that it may be “impossible to predict the eventual outcome” of the situation. With the European summit at the end of this month, investors remain hopeful that resolutions can begin to emerge. Nevertheless, it is apparent that the developments in the following three months will be crucial to the future of the euro and Europe as a whole. It remains to be seen if Soros’ other predictions also come to fruition.
The entirety of George Soros’ speech at the Festival of Economics can be found here.
See our complete series of blogs on the Eurozone crisis