George Soros on CNBC: More Needed to Safeguard Euro Zone
"It did not solve the problem of the heavily indebted countries that now are in a position of a Third World country that it is too heavily indebted in a foreign currency," said Soros, who spoke in a wide-ranging interview with CNBC's Maria Bartiromo at the 2012 World Economic Forum in Davos, Switzerland.
Soros, 81, a Hungarian-American business leader, is chairman of the Soros Fund Management. He is also an active philanthropist and human-rights activist.
He said what's needed beyond the recent ECBaction is a European-wide solution to the region's debt crisis. Instead, there's a trend of so-called "ring fencing," where nations are only lending to their respective, national banks.
Without intervention, he said: "It actually could eventually prepare the ground for a breakdown of the euro, if the financial system of each country becomes much more self-contained. But that's not really where they want to go."
Soros added, "Gradually it's bringing down the interest rates. However, I don't think it's a strong enough 'ring fence' if and when Greece defaulted. And there is a real danger of that happening, a possibility," Soros said. "And you need to strengthen Italy and Spain against that."
Soros' tough words for the European Union came on the opening day of the 42nd annual Davos forum, where global political and business leaders are meeting from Jan. 25 to 29.
Euro 'Full of Defects'
Soros went on to say the time is now to edit the euro zone's playbook. "The rules are stepping stones, they're not cast in stone that you can't change them. It turns out that the euro is full of defects," Soros said. "We must be willing to change the rules, and there you have very strong resistance, particularly from the old guard of the Bundesbank that lost their jobs and are really standing in the way."
In two years, the euro will have to look different, Soros said. "It will have to because it doesn't work the way it is," Soros said. "The heavily indebted countries are like Third World countries that borrowed in a foreign currency."
Potential Eurozone Scenarios
"You'll either have disintegration and the euro falling apart, which would have catastrophic consequences, and really a potential meltdown, worse than you had in 2008, a real disintegration. Or, you have more integration," Soros said.
"But now it's something that is forced upon the people. It has to be something that actually inspires people. And for that, you have to recapture Europe as, what I call, a 'fantastic object' — something that is desirable, that is actually beneficial." That desire along with political will are themes Soros addresses in his new e-book, "Financial Turmoil in Europe and the United States."
Looking ahead, Soros said changing the eurozone must happen by next year at the latest. "I think it's slowly happening in Germany already," he said. "I think certainly 2013, it has to be."
On the U.S. Economy, Natural Gas, Global Economy
On the U.S. economy, Soros said America is on the mend. "The economy actually is showing considerable strength," he said.
For example, "the glut of cheap natural gas, for shale gas, is making a big difference in making American manufacturing more competitive. You see strength in manufacturing, which is really a reversal of the trend of last 20 years," Soros said.
On the global economy, Soros saw few pockets of vibrancy. "China is now coming to a cyclical slowdown because the housing bubble has burst and so on. India, I have just been there, that has also got some problems," he said.
"Africa is doing well. Latin America is doing well. But, you could have a slowdown coming from China. So the world economy is facing a slowdown," Soros said.
Growing EU Hostility
Back on Europe, Soros said he saw Germany's growing clout within the EU and growing tension and dissension among the bloc's smaller nations. The region's disintegration accelerated in 2008 after the global financial meltdown, and German Chancellor Angela Merkel said the EU would guarantee the region's financial institutions — but that there would be a country-specific response, not a euro-wide strategy.
"That was the beginning of the euro crisis. And things have gotten worse," Soros said. "And a decline in economic activity, which is now occurring because of the credit crunch is going to reinforce the political disintegration, and that would be fatal politically. And therefore it can't be allowed, it musn't be allowed to happen," he said.