In yesterday’s FT, George Soros sided with two of three main policies in our Modest Proposal 2.0 and took a position largely in tune with our third policy. First, he agreed that the current euro crisis is significantly a banking crisis and, thus, adopted the policy (that the Modest Proposal 2.0 first made) that the EFSF or its ESM offshoot (after 2013) should be utilised primarily to force banks to recapitalise. Secondly, he also proposed a transfer of the existing level of Maastricht-compliant debt to eurobonds. Thirdly, he prognosticated that the medium term effects of the policies that will be approved formally on 25th March at the EU summit will be a two speed Europe, meaning that the periphery will be condemned to an investment crisis that will drag the whole of the continent down. In this sense, Soros’ prognosis is utterly consistent with our third policy recommendation: namely, energising the European Investment Bank and the European Investment Fund as the agents of Pan-European Recovery.
In the next couple of days, we touched up variant of the Modest Proposal (Version 2.1?) will appear here, taking into account the recent contributions of a number of participants in this debate, George Soros and Lorenzo Bini Smaghi included. So, watch this space. For the time being, here are a couple of telling quotes from the recent Soros article:
- Germany blames the crisis on the countries that have lost competitiveness and run up their debts, and so puts all the burden of adjustment on debtor countries. This is a biased view, which ignores the fact that this is not only a sovereign debt crisis but also a currency and banking crisis – and Germany bears a major share of responsibility for those crises.
- Berlin is imposing these arrangements under pressure from German public opinion, but the German public has not been told the truth and so is confused.
- First, the European financial stability facility must rescue the banking system as well as member states. This will allow the restructuring of sovereign debt without precipitating a banking crisis.
- Second, to create an even playing field, the risk premium on the borrowing costs of countries that abide by the rules will have to be removed. That could be accomplished by converting most sovereign debt into eurobonds; countries would then have to issue their own bonds with collective action clauses and pay the risk premium only on the amounts exceeding the Maastricht criteria.