Monday, 8 March 2010

Euro ‘May Not Survive’ Deficit Crisis, Soros Says

The euro is being “severely tested” and “may not survive” the Greek deficit crisis, billionaire investor George Soros said.

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Guanyu said...

Euro ‘May Not Survive’ Deficit Crisis, Soros Says

By Ann Hughey
28 February 2010

(Bloomberg) -- The euro is being “severely tested” and “may not survive” the Greek deficit crisis, billionaire investor George Soros said.

The European currency’s construction is “flawed” because there is “a common central bank, but you don’t have a common treasury,” Soros said on CNN’s “Fareed Zacharia GPS” program.

“The exchange rate is fixed. If a country gets into difficulty, it’s can’t depreciate its currency, which would be the normal way,” Soros said. “And it’s not getting the kind of transfer payments that American states get if they happen to be doing worse than other states.”

Greece’s debt has put the euro on its longest losing streak against the dollar since November 2008. Investors have also grown concerned about budget deficits in other euro-region countries such as Spain.

Soros predicted Greece will survive its fiscal crisis, “but it still leaves Spain and the other countries” facing similar difficulties. “And so either Europe now takes the institutional measures that are needed to make up for the deficiency or, in fact, it may not survive,” he said of the euro.

Writing in the Financial Times last week, Soros said that if European Union member-countries don’t take the next step toward political union, the common currency may disintegrate.

While the latest meeting of European finance ministers pledged to safeguard financial stability in the euro area as a whole, no mechanism has been set up for doing that, Soros wrote.

Sell Eurobonds

The best solution for Greece would be for EU countries to sell eurobonds to refinance 75 percent or so of its maturing debt, provided it meets its targets, leaving the country to finance its remaining needs as best it may, Soros said in the newspaper.

Harvard University Professor Martin Feldstein, who warned in 1997 that European monetary union would spark greater political conflict, said Feb. 12 that Greece’s fiscal woes expose the fault lines of the single currency project.

A day after EU leaders promised “determined and coordinated action” to help Greece control its budget deficit, Feldstein said the weakness of having a single monetary policy and different fiscal policies is being revealed.

Higher Taxes

EU finance ministers have told the Greek government to be prepared at a March 16 review to adopt higher value-added taxes, a new levy on luxury goods, increased taxes on energy products and cuts in capital spending if Greece can’t show sufficient progress in bringing down the deficit, which at 12.7 percent of GDP last year was the EU’s highest.

With EU Monetary Affairs Commissioner Olli Rehn flying to Athens tonight for talks, German lawmakers say euro-area officials are crafting a plan to grant Greece about 25 billion euros ($34 billion) in aid should the need arise, possibly by using state-owned lenders such as Germany’s KfW Group to buy its debt.

Soros also endorsed a proposed tax on financial transactions, called a Tobin tax after the late U.S. economist James Tobin, a Nobel laureate who proposed a surcharge on currency trading to deter speculation.

“Why shouldn’t those transactions provide the revenues to make up the losses,” Soros said. “I think it’s a natural source of revenues.”

Soros, who supported Barack Obama during the 2008 presidential campaign, said he’s “not satisfied” with the job Obama has done. “The solution he found to the financial crisis, which was to effectively bail out the banks and allow them to earn their way out of the hole, was, in my opinion, not the right solution,” Soros said.
“He should have compulsorily replaced the capital that was lost,” Soros said. “This is what they call nationalizing the banks. And he made the political decision that that is un-American, will not be accepted.”