The Euro and the Future of Europe

Rockport History Book Club

The Future of Europe

Wednesday, June 24, 2015

George Soros, The Tragedy of the European Union: Disintegration or Revival? With Gregor Peter Schmitz; New York: Public Affairs, 2014.

          George Soros should be a good person to give you an idea of the future of Europe.

          Born in Budapest in 1930 in a Jewish family, Soros lived through the Nazi occupation and then the Stalinist era in Hungary, before fleeing in 1947. He landed in England, and somehow got into the London School of Economics. While he was there he studied Karl Popper’s work. Popper (1902-1994) began to make a huge impression on Soros. 

          Soon Soros was working in New York as a financial analyst and drew on Popper’s work in developing his application of the social theory of “reflexivity”. Soros has stayed with that theory all his life, and he discusses it at length in this book.

          Soros applied his idea on reflexivity to investing, using it to predict, among other things, financial bubbles.  In 1973 he set up a private investment firm that eventually evolved into the Quantum Fund, one of the first hedge funds.

          This book is a collection of four interviews of Soros by Gregor Peter Schmitz, Washington correspondent for Der Spiegel. 

          Soros has been a close observer and supporter of the European Union and the consolidation of European currency in the Euro.  The European Union has been a dream of European leaders for many years, but with the fall of the Soviet Union, it began to become a possibility, and the Maastricht Treaty of 1993 formalized the European Union. The Euro (€) became official currency in the E.U. countries January 1, 1999. Today there are 28 member nations, and 19 use the Euro as their currency.

          When the European Union was formed the dream was to create a United States of Europe, with decisions made at the EU level, rather than in each national capital.  That dream has faded away, though, and there is much tension in the European Union. 

          Soros identifies the current situation in the title of this book “The Tragedy of the European Union”, and he blames Angela Merkel for most of it.  He looks to Germany, as the most powerful and rich country, to be the benevolent hegemon, supporting the poor countries like the United States did after World War II with the Marshall Plan.

          Actually, Soros observes in his first interview in this book, that the Marshall Plan led to the European Union because it established mechanisms for cooperation between countries, re-establishing markets and building a European economy. 

          Soros says the euro is an “incomplete currency”, because it represents economic unity but not political unity, it has a central bank, but no treasury.

          It all came unglued in 2008 when Lehman Brothers failed, triggering the American recession, and then European markets followed.  Soros says that if Helmut Kohl had still been leading Germany, it would have been different.  German leaders who had lived during World War II had a lot of guilt, and selflessness, and they would have pushed for sacrifice to support the poor nations.  However, Angela Merkel, reading the mood of the German people today, had no such idea, and without that Herculean support for the Euro, Greece, Italy and Spain began to face severe financial strains, and today, the existential crisis in Europe is around Greece.  Will the country, now led by a socialist government and having rejected the austerity program Germany has demanded of it, leave the E.U. and the Euro? In the national election held on July 5, Greeks overwhelmingly voted NOT to knuckle under to Germany’s demands for austerity and constriction.

          It’s all being played out today, and although Soros conducted these interviews two years ago, his comments still seem quite relevant.

          In Soros’ second interview, he finds Angela Merkel “an extremely skillful democratic politician who reads the mind of the electorate very well.” But he finds that she is making a mistake –the euro is only a means to an end, which is a fully-functioning European Union. The euro has transformed the European Union from a voluntary association of equal states to a debtor-creditor relationship.

          Germany should “lead or leave the euro.” He advises. But, Soros doesn’t feel that Germany should leave. He suggests it would be far better for Germany to become a benevolent hegemon by agreeing to mutual guarantees, agree to a strong banking union and some form of Eurobonds. He makes the point over and over in this book—Germany should lead the Europeans out of the looming depression with genuine burden sharing. 

          In Soros’ third interview he introduces “reflexivity”, which he finds to be one of the most important driving forces of financial markets and the world economy. He then tells about the Credit Default Swap (CDS) speculation before the Lehman bankruptcy.  CDS came to be viewed as a good indicator of default probabilities facing companies—like Lehman.  When speculators began to buy CDS heavily there was a perception that owners of those bonds faced much greater risks, and so investors started to dump those bonds. 

          Market speculation actively increased the risk of default that CDS were supposed to passively reflect. When this triggered a euro crisis, Merkel insisted that rescue of the banks should be the responsibility of each country individually.  Soros thinks that she should have agreed to support the banks on a euro-wide basis, which may have ended the possibility of a currency crisis.

          That was—in 2009—really the onset of the euro crisis.  Markets failed to identify the flaws in the euro structure, and when they did, they overreacted.

          The Tragedy of Europe is that the European Union is now endangered by too much respect for the rule of law. Soros says that when laws are based on faulty economic doctrines, they can do a lot of harm.

          The fourth and final interview sweeps up several European problems.  Migrants—the hundreds of thousands escaping from Syria and Africa -- place a huge burden, primarily on southern European countries, those in weakest financial shape.

          There is discussion of Soros’ work with charities.  He states that, at age 84 (now), he had largely left the investment business, but he still needs to raise money for his huge portfolio of philanthropy.  In 2012 he spent some $800,000,000 on this wide array of charitable causes.

          One in particular that has captured Soros’ attention is the plight of the Roma people (Gypsies) in Europe. 

          Another is aiding Ukraine in the face of Russian invasion and interference.

          Soros is optimistic about the possibility for positive gains in Palestine, with the help of Egypt.

          He feels that Obama is conducting a far more realistic and sensible foreign policy than did Bush, but Syria is troubling.

          He sees positive movement in Iran, and looks upon Netanyahu as thriving upon the conflict with Iran. If the U.S. and Iran agreed on a nuclear policy, Netanyahu will be out of business, he says.

          On China, he sees that country quite caught up in its own problems.  It has bought up a lot of European debt merely to stabilize exports from China to Europe.

          Soros says that the Republicans are going to have to distance themselves from the Tea Party, because both parties need to aim for the middle ground. The American public will not buy into the Tea Party’s goals.

          Soros’ observations and ideas seem refreshing and challenging, and give us a lot to think about with regard to the future of Europe. 

-end-

         

 --Samuel W. Coulbourn

 COMING ATTRACTIONS:

Wed. July 29, 2015: History of the American Family. [Proposed by Richard Verrengia] How has the American family changed since Pilgrim days?  What was the Pilgrim family like? How did the Industrial Revolution change the family? What about new, "non-traditional" families? 

Wed. Aug. 26, 2015: The History of Food in America. [Proposed by Janos Posfai] Let’s explore what Americans have considered a square meal, starting with Native Americans (Indians), and including Pilgrims, then people arriving from other parts and classes of England, Ireland, Scotland, Germany, Italy, Russia, African slaves, China; look at regional foods from the South, New England, the West, Midwest.

Wed. Sep. 30, 2015:  Charismatic leaders in History. [Proposed by Janos Posfai] What were the keys to Hitler’s, Churchill's, Mussolini's, FDR's successes? Keen perception of public moods? Oratory abilities? Character, firm ideology? Connecting to the people? How did they deploy their charisma? How could Napoleon manipulate the masses without TV ads? Why were people so perceptive to a madman in Germany? Intriguing and recurring questions.  

Wed. Oct. 28, 2015: Show Trials in History. [Proposed by Janos Posfai]   Read how nations and leaders have used a well-publicized court trial to serve another need, like demonstrating power, making peace, deflecting responsibility, etc.

Examples: Trial of Socrates; Martin Luther at the Diet of Worms; Sacco Vanzetti; Nuremburg War Crimes Trials; Julius and Ethel Rosenburg; Trial of Nicolae and Elena Ceaușescu;  Saddam Hussein in Iraq;   Stalin’s NKVD show trials; Trials in Stalinist Hungary like Cardinal József Mindszenty, oil executives, L. Rajk. 

Wed. Dec. 2, 2015:  No meeting