Soros’ cunning plan

George Soros’ plan

We read with great interest a paper just published by George Soros, that will be presented at a conference shortly in Europe this week on the eurozone crisis. What was impressive about the paper is that Mr Soros has put forward a plan for Europe to move forward and avert a deepening crisis that could bring on “a lost decade” as he puts it.

Mr Soros calls for a European Fiscal Authority (not union as he says this as implausible and we think many would agree), a Debt Reduction Fund and European Treasury Bills as mechanisms for Europe to move out of the crisis. 

Interestingly, in the first paragraph of his proposal Soros again highlights the problem at the core of the crisis:

 “The main source of trouble is that the member states surrendered their right to print money to the ECB without fully realizing what that entails – and neither did the European authorities.”

Specifically, Soros’ plan calls for the following key steps to be implemented:

“What is needed is a set of bold initiatives that are convincing enough to persuade both the public and the financial markets that the authorities have both the will and the resources to make the euro work. These initiatives have to conform with the existing Treaties yet they have to be bold enough to bring conditions back closer to those that were prescribed by Treaties. The Treaties could then be revised in a calmer atmosphere so that the current excesses will not recur. It is difficult but not impossible to construct a set of initiatives that will meet these tough requirements. They would have to simultaneously tackle the banking and the sovereign debt problems without neglecting to reduce divergences in competitiveness. There are various ways to provide it but they all need the active support of Germany as the largest creditor country.”

Essentially the proposal which will shortly be presented at a European summitentails the following components along with the need for a political declaration which outlines the longer term vision for political union, but also practical steps towards constructing a fiscal and banking union which would address the concerns of the financial markets over the near term.

Soros’ plan calls for the introduction of the following mechanisms:

•        A European Fiscal Authority (EFA) which will serve as the embryo of the fiscal union and also provide fiscal backing for an embryonic banking union.

•        A Debt Reduction Fund (DRF) which will provide immediate relief to the periphery countries on refinancing their sovereign debt by issuing European Treasury Bills.

In the very short term and in the interests of calming markets, Soros also calls for the ECB to start accumulating Italian and Spanish bonds in anticipation of Intergovernmental Agreement and for the European Stabilisation Mechanism to take over the ECB’s holdings of Greek bonds insuring the ECB against default risk. No implementation of austerity measures as long a country has negative GDP growth rate. Finance Ministers start negotiating structural reforms that will qualify “periphery” countries to benefit from the debt reduction scheme.

Soros’ argument is that “laying the groundwork for a banking union and substantially reducing the financing costs of sovereign debt would offer an escape route from the deflationary debt trap in which the European Union is currently caught.”

The plan which will be published in the Financial Times today, also warns that any decisive policy changes will depend almost entirely on the political will of Germany and that Germany alone would be to blame in the event of a Eurozone breakdown and the consequential political and economic fallout and dislocation may positive action.

Powerful words indeed from the world’s wealthiest financial markets trader.

Self preservation is a powerful motivator and patently Germany needs to act decisively in order to preserve not just the periphery and problematic nations, but the very core of which it dominates.

There is no question that the stakes are high and that Europe is looking into the abyss. A failure to take the necessary steps and deepening of the crisis will only cost Germany and all of Europe dearly in the end.

We think what makes the Euro crisis unique in many instances is that lessons were learnt in the 20^th century after two world wars and tremendous loss of life. Perhaps it will be this formidable experience that will bring Europe back from the edge. We believe that Europe and Germany must find a way through and do all that’s necessary, not just the minimal – for the downside in this instance far outweighs the upside.