11 April 2012

George Soros: Reversing Europe’s renationalisation

The crisis has entered what may be a less volatile but more lethal phase, writes Soros for Project Syndicate. The future of Europe is a political issue: it is beyond the Bundesbank's competence to decide.

The Bundesbank has seen the danger. It is now campaigning against the indefinite expansion of the money supply, and it has started taking measures to limit the losses it would sustain in a break-up. This is creating a self-fulfilling prophecy: once the Bundesbank starts guarding against a break-up, everybody will have to do the same. Markets are beginning to reflect this.

The only way to escape the trap is to recognise that current policies are counterproductive and change course. I cannot propose a cut-and-dried plan, only some guidelines. First, the rules governing the eurozone have failed and need radical revision. Defending a status quo that is unworkable only makes matters worse. Second, the current situation is highly anomalous, and exceptional measures are needed to restore normality. Finally, new rules must allow for financial markets’ inherent instability.

Most important, some new, extraordinary measures are needed to return conditions to normal. The EU’s fiscal charter compels Member States to reduce their public debt annually by one-twentieth of the amount by which they exceed 60 per cent of gross domestic product. I propose that Member States jointly reward good behaviour by taking over that obligation. They have transferred to the ECB their seignorage rights, valued at €2 trillion-€3 trillion by Willem Buiter of Citibank and Huw Pill of Goldman Sachs, working independently. A special purpose vehicle owning the rights could use the ECB to finance the cost of acquiring the bonds without violating Article 123 of the Lisbon treaty.

Should a country violate the fiscal compact, it would be obliged to pay interest on all or part of the debt owned by the SPV. That would surely impose tough fiscal discipline. By rewarding good behaviour, the fiscal compact would no longer constitute a deflationary debt trap. The outlook would radically improve. In addition, to narrow the competitiveness gap, all members should be able to refinance existing debt at the same interest rate. But that would require greater fiscal integration. It would have to be phased in gradually.

The Bundesbank will never accept these proposals, but the European authorities ought to take them seriously. The future of Europe is a political issue: it is beyond the Bundesbank’s competence to decide.

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© Project Syndicate