The second bailout for Greece, the epicenter of the euro zone debt crisis, and recent liquidity programs have not resolved the euro zone debt crisis and the EU is unlikely to survive without far-reaching reforms, George Soros, chairman of Soros Fund Management said on Thursday.
In a commentary piece for the Financial Times, Soros warned that "Europe is facing a long period of economic stagnation or worse" with the continent unlikely to survive its destabilizing effects.
"Other countries have gone through similar experiences. Latin American countries suffered a lost decade after 1982, and Japan has been stagnating for a quarter of a century; both have survived. But the European Union is not a country and it is unlikely to survive. The deflationary debt trap threatens to destroy a still-incomplete political union," he wrote.
Recent weeks have seen Spain take over the sorry mantle from Greece as Europe’s sick dog and markets, investors and policy makers had shifted their focus and concerns to the country now seen as increasingly likely by some experts as needing a bailout in time.
In his piece for the paper the billionaire investor said the European Central Bank’s secondLTRO (Long Term Refinancing Operation) did nothing to resolve the underlying problems within the euro zone.
The ensuing market rally hid what will be the eventual fallout from the unresolved issues, he said.
While Germany has consistently said that a euro zone break up is unfeasible and will never occur as the crisis has dragged on, calls for a break-up have grown louder.
Soros wrote that the euro zone had now become more orientated along national lines as the crisis had deepened.
Soros warned against what he sees as domination of the euro zone’s fate by Germany’s central bank, the Bundesbank.
He said “the Bundesbank has seen the danger and is campaigning against the indefinite expansion of money supply” but this has led to a “self-fulfilling prophecy”.
Once the Bundesbank guards against a break-up others do too and the markets have caught on.
With so much opacity, he does not have a concrete plan for the euro zone but said that policy makers must change course.
Soros argued that the euro zone's battle to defend a mechanism that doesn’t work simply exacerbates the situation.
Secondly, he pointed out that the current situation was “highly anomalous” with exceptional measures needed to restore normality, and thirdly, new rules to tackle financial markets’ inherent instability need be created.
In the piece, Soros proposes that the fiscal compact – the agreement struck by 25 of the EU's 27 member states to limit budget deficits and debt – should be modified with revisions to which types of debt are accepted and distinguishing between investments that pay, and spending.
As part of the “extraordinary” measure needed to return normality to the euro zone he suggests that where the EU Fiscal Charter - or compact - demands that member states reduce their public debt annually by one-twentieth of the amount by which they exceed 60 percent of GDP, member states take up that obligation as a reward for good behavior.
Failure to do so would incur interest payments on all or part of the debt, thus ensuring tough fiscal discipline.
However, he concedes that the Bundesbank will never agree to these proposals but they should be given due consideration because the future of Europe is political not economic and “beyond the Bundesbank’s competence to decide”.