Germany’s role as the fiscal taskmaster for Europe will create tensions that could destroy the eurozone, billionaire investor George Soros said Wednesday.
Soros said the European Central Bank’s efforts to boost liquidity has helped the banking system, but did little for the highly-indebted members of the union.
“It leaves the weaker members of the eurozone relegated to the status of third world countries that became highly indebted in a foreign currency,” Soros said in remarks at the World Economic Forum in Davos, Switzerland.
But ‘instead of the IMF, Germany is acting as the taskmaster imposing fiscal discipline,” he said. “This will generate tensions that could destroy the European Union.”
Earlier Wednesday German Chancellor Angela Merkel urged the eurozone to reject “unfounded” stereotypes about a domineering, dogmatic Germany.
She has been lampooned as a Nazi and a dominatrix in newspaper cartoons and protest banners across Europe, but above all in Greece, for demanding fiscal discipline as a condition for international aid during the two-year-old euro debt crisis.
“There are lazy Germans and hard-working Germans, left-wing Germans and conservative ones. There are those who support competitiveness and those who want redistribution. Germany is just as varied as the rest of Europe. We should bury the old stereotypes,” said the conservative German leader.
But Merkel also stressed that Berlin does not have unlimited resources to bail out the debt-ridden eurozone.
Soros’s idea is to allow Italy and Spain to refinance their debt by issuing treasury bills at around 1%, a plan he calls complicated, but “legally and technically sound.”
He said he is not accusing Germans of acting in bad faith, but it is impossible for all countries in the union to be like them. “In a closed system like the euro-clearing system, creditors must always be balanced by debtors.”
“It is Germany that dictates European policy because at times of crisis the creditors are in the driver’s seat. The trouble is that the austerity that Germany wants to impose will push Europe into a deflationary debt spiral. Reducing the budget deficit will put both wages and profits under downward pressure, the economy will contract and tax revenues will fall. So the debt burden, which is a ratio of the accumulated debt to the GDP, will actually rise, requiring further budget cuts, and setting in motion a vicious circle.
“The fact that an unattainable target is being imposed creates a very dangerous political dynamic. Instead of bringing the member countries closer together it will drive them to mutual recriminations. There is a real danger that the euro will undermine the political cohesion of the European Union.”
Financial Post
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