Greece's upcoming elections will allow it to remain part of the euro zone, and the common currency will stay intact because a split would be "devastating" for smaller, weaker nations as well as European economic powerhouse Germany, George Soros predicted in a speech over the weekend.
"I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a 'fantastic object' -- unreal but immensely attractive," he said. "The EU was the embodiment of an open society —- an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position."
What's crucial now is Germany, the largest European economy and one of the most important in the world. "We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be," Soros said. "The future of Europe depends on it."
Germany's economy continues to grow, while the euro zone at large is in decline, he noted, meaning that a "divergence" is widening between the Germans and just about everyone else. "The political and social dynamics are also working toward disintegration," Soros said. "Public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed. So something has to give."
Soros said that in his view, the "authorities" -- by which he primarily means Germany -- have three months to "correct their mistakes and reverse the current trends."
Why three months? He explains as follows:
"I expect that the Greek public will be sufficiently frightened by the prospect of expulsion from the European Union that it will give a narrow majority of seats to a coalition that is ready to abide by the current agreement [Note: Greek elections are scheduled for June 17]," he said. "But no government can meet the conditions so that the Greek crisis is liable to come to a climax in the fall. By that time the German economy will also be weakening so that Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities. That is what creates a three months' window."
Among other things, Soros contends that banks need a European deposit insurance plan that will keep capital from leaving the continent, direct financing by the European Stability Mechanism and broad supervision and regulation.
"The heavily indebted countries need relief on their financing costs," he said. "There are various ways to provide it but they all need the active support of the Bundesbank and the German government." Germany, he foresees, "is likely to do what is necessary to preserve the euro -- but nothing more."
While what will eventually happen to Europe can't be known, Soros does believe that a "gradual reordering of the financial system along national lines could make an orderly breakup of the euro possible in a few years' time and, if it were not for the social and political dynamics, one could imagine a common market without a common currency."
An earlier breakup, he says, would almost certainly be "disorderly" if not calamitous, leading potentially to the collapse of the common market system and the EU itself. "But the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany," he said.
For more on Soros' comments, read his entire speech. Then let us know what you think. Should the euro zone ensure that its weaker economies are protected and allowed to stay in the common currency? Is it already too late to preserve the euro? Can and should Germany do more?
- Politics & Government