In recent commentary in the Financial Times, as well a speech he delivered in Berlin to celebrate the release of his latest book, Soros says that “far from abating, the euro crisis has recently taken a turn for the worse.”
The European Central Bank relieved an “incipient” credit crunch through its longer-term refinancing operations. The resulting rally in financial markets hid an underlying deterioration; but that is unlikely to last much longer, according to Soros.
“The fundamental problems have not been resolved,” he said. “Indeed, the gap between creditor and debtor countries continues to widen. The crisis has entered what may be a less volatile but more lethal phase.”
The only way to “escape the trap” is to recognize that current policies are counterproductive and change course. He acknowledges he cannot propose a cut-and-dried plan, only some guidelines.
“First, the rules governing the euro zone have failed and need to be radically revised. Defending a status quo that is unworkable only makes matters worse,” he writes.
Second, the current situation is highly anomalous, and exceptional measures are needed to restore normalcy. Finally, he says new rules must allow for financial markets’ inherent instability.
So how to go about it?
“Some new, extraordinary measures are needed to return conditions to normal,” he said. “The E.U.’s fiscal charter compels member states to reduce their public debt annually by one-twentieth of the amount by which they exceed 60% of gross domestic product. I propose that member states jointly reward good behavior by taking over that obligation.”
They have already transferred to the ECB their seignorage rights, he says. A special-purpose vehicle owning the rights could use the ECB to finance the cost of acquiring the bonds without violating Article 123 of the Lisbon treaty.
“Should a country violate the fiscal compact, it would be obliged to pay interest on all or part of the debt owned by the SPV,” Soros adds. “That would surely impose tough fiscal discipline.”
By rewarding good behavior, he concludes, the fiscal compact would no longer constitute a deflationary debt trap.
“The outlook would radically improve. In addition, to narrow the competitiveness gap, all members should be able to refinance existing debt at the same interest rate. But that would require greater fiscal integration. It would have to be phased in gradually.”