George Soros has made a prediction. Again. EU-authorities have a 3-month window to correct their mistakes; or else! To Soros, it is clear what is needed: a European fiscal authority that is able and willing to reduce the debt burden of the periphery, as well as a banking union.
Mr. Soros is undoubtedly a brilliant mind but as opposed to brilliant minds who come from academia, he is a brilliant mind who comes from the hedge fund industry. His claim to fame is having once successfully blackmailed the UK government. Would you entrust such a man the future of Germany’s tax money and bank deposits?
It is safe to predict that we will neither see a European fiscal authority nor a banking union in the foreseeable future, and that is good! The EU has enough institutions to solve its problems. What the EU lacks are political leaders who are pepared to call a spade a spade and to define problems in simple language. To stay with the language of hedge fund managers: there is always an underlying and a derivative. In today’s Eurozone crisis, the debt problems are the derivatives. The underlying is how some of the deficit economies work.
Take Greece as an example. After 4 years of crisis with dramatic declines in the level of economic activity (including a decline in imports from 64 BEUR in 2008 to 47 BEUR in 2011), Greece still ran a current account deficit of 8% in 2011. For 2012, it is likely to be lower but still well over 5%. Greece is still spending 1.380 Euros abroad for every 1.000 Euros it earns abroad. At it is importing even 2.205 Euros for every 1.000 Euros it exports. The numbers for Spain and Portugal are similar.
The normal procedure is that one first makes a business plan and then one structures the financing around it. For over 2 years now, EU-authorities have focused on financing structures without discussing a business plan for the Eurozone overall and for individual countries. This is like saying: “We don’tknow where we are going but the faster we drive, the sooner we’ll get there!”
The problem is that financial markets do not see today how the underlying of the Eurozone in its present structure can work again. The levels of competitiveness are too different between the Core and the Periphery. And as a result of this uncertainty, markets speculate with the derivatives.
The wonderful thing about a plan is that if it credibly points towards a light at the end of the tunnel, towards a turn-around from current chaos, then markets will cease to speculate against it.
Such a plan for the Eurozone must focus on bringing the flow of products, services and capital back in balance again. Free market forces alone will not achieve this because in a country like Greece, the free flow of imports into and the free flow of capital outside the country have ruined the economy. Instead, there will have to be – at least for a certain transition period – very strong incentives and disincentives to achieve the desired results. How that could be done should occupy the most brilliant minds.
The idea that surplus countries transfer money to, say, Greece so that Greece can import all the products it wants to have and that Greeks can transfer all their savings abroad – that is not a workable idea for either the surplus countries nor for Greece. Surplus countries simply will refuse do to it forever and Greece has deserved better than to assume the role of the recipient of donations from others.
Greece ranks as the EU’s least attractive place to do business (World Bank) and as the most corrupt country (TI). The overall objective of a new business plan would have to be to dramatically turn these two ratings around. Greece would have to start new production for import substitution. Financing should come from private foreign investment. The latter, of course, will only come if Greece becomes an attractive place to do business and less corrupt.
One cannot change an entire country from A-Z in a short period of time. One can, however, start from scratch in selective areas and wherever one starts froms scratch, one can start the right way. Special Economic Zones would be the right instruments for facilitating “new economic beginnings” in parts of Greece. If they work well, they will rub off on the rest of the economy over the years.
The surplus countries won't be able to have the cake and eat it forever, and Greece will not forever have food if it doesn't start baking cake on its own. These could actually be very good times for the Eurozone: the Euro has lost about 25% of its value in a rather short period of time. The Eurozone should normally be spending its time figuring out how to take advantage of this new competitiveness in world markets.
Instead, the entire focus is on financial acrobatics and Mr. Soros makes sure that it stays that way. Perhaps the brilliant hedge fund manager has a financial position to protect.