NEW YORK — There is a real danger that the “nightmare” euro crisis could destroy the European Union and Germany should either step up to fix it or step out of the currency union altogether, fund manager George Soros said on Monday.
The crisis “is having tremendous impact in the state of affairs, it is pushing the EU into a lasting depression, and it is entirely self-created,” said Soros, Chairman of Soros Fund Management.
“There is a real danger of the euro destroying the European Union. The way to escape it is for Germany to accept … greater commitment to helping not only its interests but the interests of the debtor countries, and playing the role of the benevolent hegemon,” he said at a luncheon hosted by the National Association for Business Economics.
Germany should act as the leader of the union such as the United States was for the free world after the Second World War, Soros said.
The influential fund manager floated another solution to the crisis that has gone on for more than two years: Germany could leave the euro, “and the problem would disappear in thin air,” as the value of the euro declines and yields on the bonds of debtor countries adjust.
The notion that governments are “riskless” is the main false assumption underlying the euro zone, Soros said, adding it could be corrected by introducing Eurobonds.
“But that has become politically unacceptable by Germany,” he added.
Soros also weighed in the Chinese economy, saying the country’s growth is slowing because household spending as a percentage of the world’s second largest economy is waning.
“The growth model which has worked is running out of steam because consumption as a percentage of GDP has fallen” to one- third of output from half, Soros said. Central bankers “will have to modify the growth model and somehow allow the household sector to have a bigger share of the total.”
China’s economy expanded 7.6% in the second quarter from a year earlier, the least in three years. The IMF this month cut its estimate for China’s 2012 growth to 7.8%, which would be the weakest pace since 1999, from 8%.
Soros said the unprecedented actions global central banks have taken to stimulate growth are necessary to “prevent a depression,” yet the “big open question” is whether they can exit the stimulus programs when the economy rebounds without spurring inflation. The programs include three rounds of so- called quantitative easing by the Federal Reserve and the European Central Bank holding its main rate at a record low 0.75%.
“They are engaged in a very delicate two-phase maneuver,” Soros said. “First is to increase the quantity of money available and then eventually they’ll have to reduce it when the economy resumes a faster rate of growth.”
“It’s conceivable that it can be done but it hasn’t yet been done,” Soros said. “Until then the possibility that eventually you could have a much greater inflation at some point is a very real one.”