I know what you’re thinking. A book review as a weekly feature? Inspired by recent events (brexit), I decided to write a review on an illuminating volume that examines both the political and economic fault-lines of the European Union while at the same time revealing the roots of Europe’s current financial crisis.
Soros’s central argument is pretty straightforward. He argues that the eurozone faces a long period of stagnation and the risk of disintegration unless it radically restores its institutions. This of course, is hard to swallow given the recent incipient resurgence.
However, leave aside these few quarters of growth and concentrate on the long run, and Soros seems to have nailed it with his critique. Since 2009, eurozone states have taken important steps to strengthen the institutions created by the Maastricht treaty. I could definitely list several leaps forward, like for example the establishment of eurozone-wide rescue funds, the European Financial Stability Facility and its permanent successor, the European Stability Mechanism, which have already been tapped into in order to rescue the lost souls of Europe; Greece, Ireland, Portugal, Spain and Cyprus. I see a clear pattern, however; as the crisis has subsided, so has the eurozone’s drive to turn over a new leaf, despite the fact that the impetus is there.
Let me elaborate my point with the case of the “banking union”, which the eurozone vowed to build to protect weaker sovereigns against future banking crises. Sadly enough, policy makers have fallen short of creating a sufficiently large pot of cash that can be used to restructure banks. Soros argues that any burden that cannot be imposed on equity- and bondholders will again fall on the shoulders of individual countries. I quote “The so-called banking union has been transformed into something that is almost the exact opposite. Instead of creating a European banking system, it re-establishes a national silos” (Soros, 2014). Fast-forward a couple of years and there have been measures taken in this respect. As of November 2014, the European Central Bank (ECB) will be the supervisor of all 6000 banks in the euro area in the framework of the Single Supervisory Mechanism. In order to ensure that the ECB has a clear view of the situation of banks it supervises from the outset, a comprehensive assessment of banks’ financial health has been carried out. In addition, the ECB has confirmed that the balance sheets of the banks covered by its Comprehensive Assessment of 2014 are now sufficiently resilient, even under significant economic and financial stress. The Single Resolution Mechanism is built around a strong Single Resolution Board and involves permanent members as well as the Commission, the Council, the ECB and the national resolution authorities. So basically in most cases, when a bank in the euro area or established in a Member State participating in the banking union needs to be resolved, the ECB will notify the case to the Board the Commission, and the relevant national resolution authorities. In this way, the decision-making procedures have been carefully calibrated so that it will be possible to decide on a resolution case in a more prompt manner.
For the Jewish Hungarian-born billionaire, the “tragedy” of the EU has one clear culprit: Germany’s political class- in particular, the chancellor Angela Merkel. Soros argues that for a great part of the postwar era, Germany was “always willing to give a little more, and take a little less. That is what made the process of integration so successful for a time.” Unfortunately, this approach changed when Germany finally reunified in 1990. Reunification turned out to be expensive and this changed its attitude regarding the rest of Europe.
Soros explains that his faith in the EU goal of “ever-closer union” was inspired by his father, who insisted, even in the midst of the Nazi holocaust, that they should bear no personal grudge against the German people as a whole. Unlike the British euro-sceptics or German conservative economists, who always believed that the single currency was doomed to fail, Soros expected the euro to succeed. For him, the euro crisis was not an inevitable consequence of over-ambitious integration, but a result of avoidable misunderstandings in politics, economics, and finance.
This emphasis on flawed understanding points to a third feature of Soros’s thinking that makes his analysis quite unique. He presents both the euro crisis and the financial collapse related to Lehman Brothers as classic examples of “reflexivity”- a process “by which flawed economic or political theories become so powerful that they alter the social realities they are supposed to describe”. This interference between perceptions and realities create waves of instability and anxiety in markets and political systems that few economists or politicians properly understand. Soros attributes his financial success mainly to focusing on reflexivity, and he uses this concept to diagnose the flaws or the euro project as well as to explain the US banking collapse.
Fast forward a couple years later and Soros claimed that a Brexit would spark a “black” Friday” for the UK, but the devaluation of sterling would bring none of the benefits to the economy that it enjoyed after it dropped out of the ERM on 16th September 1992- A Black Wednesday, may I add.
Soros added that unlike after Black Wednesday, there was little scope for a cut in interest rates, the UK was running a much larger current account deficit, and exporters would be unable to exploit the benefits of a cheaper pound due to the uncertainty cause by a vote to exit.
Having said that, a misguided economic theory- the excessive faith in the self-regulating financial markets that Soros calls market fundamentalism- is exactly what inspired these flawed institutional structures in the first place. In Europe, the key institutional flaw was the Maastricht Treaty. The false economic theories that these structures embody changed economic and financial conditions, setting up boom-bust cycles of initial over-performance and over-confidence, that soon followed by self-reinforcing collapse.
Soros’s book initially reiterates the call he made in an essay for the New York Review of Books in 2012. Germany should lead its partners towards a more integrated eurozone. This would involve, for example, issuing mutually guaranteed debt, or so-called “eurobonds” in EU jargon. In this way, Soros not only addresses political aspects, but also economic aspects, simultaneously. However, it it this predominant focus on the economic dimension of the current crisis shared by the majority of recent analyses, which severely limits their acceptance as well as their chances of success. I do agree with Soros’s reluctance to the currently emerging two classes of member states with a clear hierarchy: creditors vs debtors. On the one hand, there are creditor countries acting as controllers, who are ranking high in the EU hierarchy, while on the other hand, at the bottom of the EU hierarchy, there are debtor countries, the recipients of support conditional on the implementation of strict economic adjustment programs, which are of course, controlled by creditor countries. Such a hierarchy is the breeding ground for anti-EU and nationalistic sentiments on either side: the population in creditor countries (the majority already busy implementing budget consolidation measures for some time now), is increasingly feeling exploited in the face of seemingly endless financial needs of debtor countries while at the same time experiencing tax increases and budget cuts themselves. And here lies yet another problem. The population in debtor countries is blaming creditor countries, and particularly Germany (surprise surprise), for the burden imposed on them by their economic adjustment programs.
Soros does acknowledge the fact that Merkel has managed to shape the EU institutions according to her vision. “The window of opportunity to bring about radical change in the rules governing the euro has closed”, he admits. In the absence of a grand leap towards more integration, the relationship between creditor and debtor countries brought about by the crisis has definitely crystallized. Furthermore, failure to act decisively will push Europe into deflation and allow the “process of disintegration” to gather much needed momentum.
I must admit, it is tempting to share this pessimism. After all, in May’s elections to the European Parliament, anti-EU forces made big progress. There is, however, one major shortfall in the current debate and the recent reform efforts on the EU level, namely the almost complete absence of a political and economic vision as to where Europe is striving to stand after having overcome the current crisis. I believe this shortfall is in fact one of the biggest threats to Europe’s future, and it is not addressed in Soros’s book, though it would make his case even stronger, if you ask me. Such a vision goes beyond pure economics and beyond the crisis and it is needed, particularly for the young all over Europe, who will be shaping the continent’s future. What many seem to forget is that one of the most important preconditions to hold Europe together, i.e. to avoid a break-up, is to avoid that the young become and/or perceive themselves as a lost generation. I mean its not like we’re in Orwell’s 1984 …or are we? Did Orwell pull a Nostradamus? Only time will tell.
A vision for a sustainable Europe needs to incorporate a view on Europe’s most pressing problems. And let’s get the facts straight. These do not only include the current record youth unemployment, the deficits in competitiveness in the so-called European “periphery countries”, and let us not forget the high indebtedness of the public and private sector. Furthermore, such a vision needs to account for the ongoing climate change or increasing income and wealth inequality, to name a couple.
This is a debate that federalists, including Soros, can potentially win. But they must go beyond simply arguing that politicians (such as Merkel) should have been more ambitious in the management of the crisis. Instead, they must acknowledge that the German chancellor, like any other EU leader, was constrained by her electorate in terms of the steps she could take. Soros should also stop spouting venom at Putin and blaming him for the refugee problem. That whole anti-Russia discourse is so 40 years ago. What would Russia stand to gain by flooding the European continent – of which it is a geographical part of – with desperate asylum seekers, many of whom may actually be card-carrying members of lethal terrorist organizations? Moreover, Russia’s economy would hardly recover anytime soon if Europe – its largest trading partner – is somehow reduced to violence and chaos as Soros somehow asserts. Tis’ a pity that individuals such as Soros, who certainly have the funds and the brains to make a positive difference in places like Europe and Syria, have chosen instead to spread vicious anti-Russia propaganda, which will only make matters worse.