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NVP
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Germany must reflect on the unthinkable
By George Soros
Published: June 24 2010 07:42 | Last updated: June 24 2010 07:42
Germany used to be at the heart of European integration. Its statesmen used to assert that Germany had no independent foreign policy, only a European policy. After the fall of the Berlin Wall, its leaders realised that German reunification was possible only in the context of a united Europe, and they were willing to make some sacrifices to secure European acceptance. Germans would contribute a little more and take a little less than others, thereby facilitating agreement.
Those days are over. The euro is in crisis, and Germany is the main protagonist. Germans don’t feel so rich any more, so they don’t want to continue serving as the deep pocket for the rest of Europe. This change in attitude is understandable, but it has brought the European integration process to a halt.
By design, the euro was an incomplete currency at its launch. The Maastricht treaty established a monetary union without a political union – a central bank, but no central treasury. When it came to sovereign credit, eurozone members were on their own.
This fact was obscured until recently by the European Central Bank’s willingness to accept the sovereign debt of all eurozone members on equal terms at its discount window. As a result, they all could borrow at practically the same interest rate as Germany. The banks were happy to earn a few extra pennies on supposedly risk-free assets and loaded up their balance sheets with the weaker countries’ government debt.
The first sign of trouble came after the collapse of Lehman Brothers in September 2008, when the European Union’s finance ministers decided, at an emergency meeting in Paris that October, to provide a virtual guarantee that no other systemically important financial institution would be allowed to default. But German chancellor Angela Merkel opposed a joint EU-wide guarantee; each country had to take care of its own banks.
At first, financial markets were so impressed by the guarantee that they hardly noticed the difference. Capital fled from the countries that were not in a position to offer similar guarantees, but interest-rate differentials within the eurozone remained minimal. That was when countries in eastern Europe, notably Hungary and the Baltic states, got into trouble and had to be rescued.
It was only this year, when financial markets started to worry about the accumulation of sovereign debt, that interest-rate differentials began to widen. Greece became the centre of attention when its new government revealed that its predecessors had lied about the size of the 2009 budget deficit.
European authorities were slow to react, because eurozone members held radically different views. France and other countries were willing to show solidarity, but Germany, traumatised twice in the 20th century by runaway prices, was allergic to any build-up of inflationary pressures. (Indeed, when Germany agreed to adopt the euro, it insisted on strong safeguards to maintain the new currency’ s value, and its constitutional court has reaffirmed the Maastricht treaty’s prohibition of bail-outs.)
Moreover, German politicians, facing a general election in September 2009, procrastinated. The Greek crisis festered and spread to other deficit countries. When European leaders finally acted, they had to provide a much larger rescue package than would have been necessary had they moved earlier. Moreover, in order to reassure the markets, the authorities felt obliged to create the €750bn European Financial Stabilisation Facility, with €500bn from the member states and €250bn from the International Monetary Fund.
But the markets have not been reassured, because Germany dictated the terms of the rescue and made them somewhat punitive. Moreover, investors correctly recognise that cutting deficits at a time of high unemployment will merely increase unemployment, making fiscal consolidation that much harder. Even if the budget targets could be met, it is difficult to see how these countries could regain competitiveness and revive growth. In the absence of exchange-rate depreciation, the adjustment process will depress wages and prices, raising the spectre of deflation.
The policies currently being imposed on the eurozone directly contradict the lessons learnt from the Great Depression of the 1930s, and risk pushing Europe into a period of prolonged stagnation or worse. That, in turn, would generate discontent and social unrest. In a worst case scenario, the EU could be paralysed or destroyed by the rise of xenophobic and nationalist extremism.
If that were to happen, Germany would bear a major share of the responsibility. Germany cannot be blamed for wanting a strong currency and a balanced budget, but as the strongest and most creditworthy country, it is unwittingly imposing its deflationary policies on the rest of the eurozone. The German public is unlikely to recognise the harm German policies are doing to the rest of Europe because, the way the euro works, deflation will serve to make Germany more competitive on world markets, while pushing the weaker countries further into depression and increasing the burden of their debt.
Germans should consider the following thought experiment: withdrawal from the euro. The restored Deutschemark would soar, the euro would plummet. The rest of Europe would become competitive and could grow its way out of its difficulties but Germany would find out how painful it can be to have an overvalued currency. Its trade balance would turn negative, and there would be widespread unemployment. Banks would suffer severe losses on exchange rates and require large injections of public funds. But the government would find it politically more acceptable to rescue German banks than Greece or Spain. And there would be other compensations; German pensioners could retire to Spain and live like kings, helping Spanish real estate to recover.
Of course, this is purely hypothetical because, if Germany were to leave the euro, the political consequences would be unthinkable. But the thought experiment may be useful in preventing the unthinkable from actually happening.
The writer is chairman of Soros Fund Management
GS.....you never call me anymore, we can do lunch again sometime
N
By George Soros
Published: June 24 2010 07:42 | Last updated: June 24 2010 07:42
Germany used to be at the heart of European integration. Its statesmen used to assert that Germany had no independent foreign policy, only a European policy. After the fall of the Berlin Wall, its leaders realised that German reunification was possible only in the context of a united Europe, and they were willing to make some sacrifices to secure European acceptance. Germans would contribute a little more and take a little less than others, thereby facilitating agreement.
Those days are over. The euro is in crisis, and Germany is the main protagonist. Germans don’t feel so rich any more, so they don’t want to continue serving as the deep pocket for the rest of Europe. This change in attitude is understandable, but it has brought the European integration process to a halt.
By design, the euro was an incomplete currency at its launch. The Maastricht treaty established a monetary union without a political union – a central bank, but no central treasury. When it came to sovereign credit, eurozone members were on their own.
This fact was obscured until recently by the European Central Bank’s willingness to accept the sovereign debt of all eurozone members on equal terms at its discount window. As a result, they all could borrow at practically the same interest rate as Germany. The banks were happy to earn a few extra pennies on supposedly risk-free assets and loaded up their balance sheets with the weaker countries’ government debt.
The first sign of trouble came after the collapse of Lehman Brothers in September 2008, when the European Union’s finance ministers decided, at an emergency meeting in Paris that October, to provide a virtual guarantee that no other systemically important financial institution would be allowed to default. But German chancellor Angela Merkel opposed a joint EU-wide guarantee; each country had to take care of its own banks.
At first, financial markets were so impressed by the guarantee that they hardly noticed the difference. Capital fled from the countries that were not in a position to offer similar guarantees, but interest-rate differentials within the eurozone remained minimal. That was when countries in eastern Europe, notably Hungary and the Baltic states, got into trouble and had to be rescued.
It was only this year, when financial markets started to worry about the accumulation of sovereign debt, that interest-rate differentials began to widen. Greece became the centre of attention when its new government revealed that its predecessors had lied about the size of the 2009 budget deficit.
European authorities were slow to react, because eurozone members held radically different views. France and other countries were willing to show solidarity, but Germany, traumatised twice in the 20th century by runaway prices, was allergic to any build-up of inflationary pressures. (Indeed, when Germany agreed to adopt the euro, it insisted on strong safeguards to maintain the new currency’ s value, and its constitutional court has reaffirmed the Maastricht treaty’s prohibition of bail-outs.)
Moreover, German politicians, facing a general election in September 2009, procrastinated. The Greek crisis festered and spread to other deficit countries. When European leaders finally acted, they had to provide a much larger rescue package than would have been necessary had they moved earlier. Moreover, in order to reassure the markets, the authorities felt obliged to create the €750bn European Financial Stabilisation Facility, with €500bn from the member states and €250bn from the International Monetary Fund.
But the markets have not been reassured, because Germany dictated the terms of the rescue and made them somewhat punitive. Moreover, investors correctly recognise that cutting deficits at a time of high unemployment will merely increase unemployment, making fiscal consolidation that much harder. Even if the budget targets could be met, it is difficult to see how these countries could regain competitiveness and revive growth. In the absence of exchange-rate depreciation, the adjustment process will depress wages and prices, raising the spectre of deflation.
The policies currently being imposed on the eurozone directly contradict the lessons learnt from the Great Depression of the 1930s, and risk pushing Europe into a period of prolonged stagnation or worse. That, in turn, would generate discontent and social unrest. In a worst case scenario, the EU could be paralysed or destroyed by the rise of xenophobic and nationalist extremism.
If that were to happen, Germany would bear a major share of the responsibility. Germany cannot be blamed for wanting a strong currency and a balanced budget, but as the strongest and most creditworthy country, it is unwittingly imposing its deflationary policies on the rest of the eurozone. The German public is unlikely to recognise the harm German policies are doing to the rest of Europe because, the way the euro works, deflation will serve to make Germany more competitive on world markets, while pushing the weaker countries further into depression and increasing the burden of their debt.
Germans should consider the following thought experiment: withdrawal from the euro. The restored Deutschemark would soar, the euro would plummet. The rest of Europe would become competitive and could grow its way out of its difficulties but Germany would find out how painful it can be to have an overvalued currency. Its trade balance would turn negative, and there would be widespread unemployment. Banks would suffer severe losses on exchange rates and require large injections of public funds. But the government would find it politically more acceptable to rescue German banks than Greece or Spain. And there would be other compensations; German pensioners could retire to Spain and live like kings, helping Spanish real estate to recover.
Of course, this is purely hypothetical because, if Germany were to leave the euro, the political consequences would be unthinkable. But the thought experiment may be useful in preventing the unthinkable from actually happening.
The writer is chairman of Soros Fund Management
GS.....you never call me anymore, we can do lunch again sometime
N
NVP
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Jees.........theres always one
I try to run a thread here that deals with the important higher issues regarding the future of the Euro and someone talks about that crude rough game of Football.......:innocent:
then again.......
the original and best England football song ever........CUMMON YOU 3 LIONS !
Last edited:
NVP
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Hi all
off to the coast for the weekend .........will post if/when i can
meanwhile I am still working on a commercial (private) subscription based forum , but its taking time alongside a stupidly busy day job..........
we'll get there in the end so stick with me........:smart:
N
off to the coast for the weekend .........will post if/when i can
meanwhile I am still working on a commercial (private) subscription based forum , but its taking time alongside a stupidly busy day job..........
we'll get there in the end so stick with me........:smart:
N
NVP
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Hi all
sorry but my connection from the coast is cr*p this weekend (??)
so not even worth trying to load attachments
been interesting though, met up with an old family friend who is still a professional gambler in his 70's but has now fully transitioned to BETFAIR and bangs away 8 hours a day arbitraging the geegees
he became independently wealthy many many years ago, but still gets up day in day out (remember geegees betting is bigger at weekend than in the week) to do it
why ? - because he is good at it and still gets the buzz making money
ho hum - fingers crossed when 3pm comes....i'll be under a sofa peeking
N
sorry but my connection from the coast is cr*p this weekend (??)
so not even worth trying to load attachments
been interesting though, met up with an old family friend who is still a professional gambler in his 70's but has now fully transitioned to BETFAIR and bangs away 8 hours a day arbitraging the geegees
he became independently wealthy many many years ago, but still gets up day in day out (remember geegees betting is bigger at weekend than in the week) to do it
why ? - because he is good at it and still gets the buzz making money
ho hum - fingers crossed when 3pm comes....i'll be under a sofa peeking
N
NVP
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Public health warning !!!!!!!!
PUBLIC HEALTH WARNING !!!!!!!!
theres a new upgrade over the weekend on ODL/FXCM
back up your saved files and templates as they could be removed when you follow the rules to upgrade
ive lost over 50 customised charts before and will certainly not be doing that this time around
so will spend today (when I can) copying and filing my precious hybrids to a safe haven before I press the button
sooo...........I will post later on using new platform when safe to :smart:
cheers
NVP
PUBLIC HEALTH WARNING !!!!!!!!
theres a new upgrade over the weekend on ODL/FXCM
back up your saved files and templates as they could be removed when you follow the rules to upgrade
ive lost over 50 customised charts before and will certainly not be doing that this time around
so will spend today (when I can) copying and filing my precious hybrids to a safe haven before I press the button
sooo...........I will post later on using new platform when safe to :smart:
cheers
NVP
NVP
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heres an unusual trading lesson to help you never never forget the first rule of successful trading
DEFENCE DEFENCE DEFENCE
The art of trading is to not lose money giving silly pips away....concentrate on not losing trades and the rest will look after itself
and never lose concentration or disclipline if a bad trade or problem hits, no ones listening and you wont get it handed back..........play on and focus focus focus.....you will win in the end (unlike ahem...)
jees..........I went and cleaned our cars when the 4th went in
http://vodpod.com/watch/3915745-sha...ny-4-1-england-goals-world-cup-2010-on-gather
DEFENCE DEFENCE DEFENCE
The art of trading is to not lose money giving silly pips away....concentrate on not losing trades and the rest will look after itself
and never lose concentration or disclipline if a bad trade or problem hits, no ones listening and you wont get it handed back..........play on and focus focus focus.....you will win in the end (unlike ahem...)
jees..........I went and cleaned our cars when the 4th went in
http://vodpod.com/watch/3915745-sha...ny-4-1-england-goals-world-cup-2010-on-gather
heres an unusual trading lesson to help you never never forget the first rule of successful trading
DEFENCE DEFENCE DEFENCE
The art of trading is to not lose money giving silly pips away....concentrate on not losing trades and the rest will look after itself
and never lose concentration or disclipline if a bad trade or problem hits, no ones listening and you wont get it handed back..........play on and focus focus focus.....you will win in the end (unlike ahem...)
jees..........I went and cleaned our cars when the 4th went in
http://vodpod.com/watch/3915745-sha...ny-4-1-england-goals-world-cup-2010-on-gather
Terrible wasn't it. Someone needs to explain to John Terry the idea behind stop-losses. If he's going to steam off upfront in an effort to be a national hero, he needs to make sure his covering team-mate isn't Gareth Barry, who only seems to be able to run in slow-motion. Actually, you could say that of most of the team - it was like their batteries were drained. Must've been all that sitting around a top-class hotel for weeks on end. Tough going.
NVP
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for all our readers who are interested
THIS is an effective stop loss in Football terms....never open yourself
up to excessive losses - just close things out and move on :smart:
http://www.youtube.com/watch?v=nM1SPwPbcDc&feature=related
N
THIS is an effective stop loss in Football terms....never open yourself
up to excessive losses - just close things out and move on :smart:
http://www.youtube.com/watch?v=nM1SPwPbcDc&feature=related
N
