by Michael Tarsala
If you want to understand what is at the heart of the euro crisis, read the latest speech delivered over the weekend in Italy from investor George Soros.
The speech puts a few M-80s in Germany’s mailbox. He argues that the Germans have about three months to act before the euro is kaput. He adds that the European union itself is like a bubble, and the current euro crisis threatens to destroy it. The crisis, he says is getting “ever deeper”, and political and social dynamics are “working toward disintegration”.
Look past the dire warnings and any political undertones, though. You’ll walk away with a better understanding of the inherent flaws of the agreement, how a divergence of competitiveness was an unwanted byproduct of the euro treaty, and the undoubted mistakes in handling the crisis.
Here are a few bullets from the speech, but you really need to read the whole thing, here.
— Soros explains why it was a mistake to create a monetary union without a political union.
— He explains how the euro was pushed through by a small group of statesmen who knew its flaws, but thought the political union would be added later.
— Many countries did not fully realize the ramifications of signing over their ability to create fiat money.
— All sovereign debt was put on equal footing at the start, which caused competitiveness to diverge (Germany getting more compeitive, the most troubled countries less so).
— Sovereign debt risk was perceived to be on equal footing, but quickly reversed when Germany’s Merkel made it clear that each country had responsibility for bailing out its banks.
— The solution to the crisis has mainly been to buy time.
— That won’t work any more. Soros discusses specific steps he thinks must be taken by both lawmakers and the banks.
— The euro will likely survive, he says –because a breakup would devastate Germany as well as the rest of the monetary union.