Tags: EU | Germany | Financial | Crisis

Soros Warns That German Budget Tightening Threatens EU

Thursday, 24 Jun 2010 07:50 AM

Billionaire investor George Soros said Germany's insistence on fiscal tightening could initiate a deflationary spiral and may ultimately endanger the European Union as a whole.

Forcing Europe's governments to slash its budgets could push the continent "into a period of prolonged stagnation or worse," Soros said in Berlin. "That will, in turn, generate discontent and social unrest."

Coming at a time when the Chinese authorities have also put on the brakes, slashing the deficits "could push the global economy into a slowdown or possibly a double dip," Soros warned.

"Unfortunately, Germany doesn't realize what it's doing," he said.

Should the European countries go forward with a coordinated effort of budget tightening, the result could be deflation, which would draw weaker countries deeper into recession and set of a spiral that would ultimately lead to even deeper budget cuts, he said.

Germany, Europe's biggest economy, pledged earlier this month in the wake of the European sovereign debt crisis to save 80 billion euros ($100 billion) by 2014.

Chancellor Angela Merkel has urged other European countries to follow suit — a recommendation that is likely to be discussed at this weekend's G-20 summit.

President Barack Obama last week cautioned leaders not to threaten the global recovery by trimming spending prematurely.

Soros sharply criticized Germany's obsession with debt reduction and said Merkel's government is now treating the Maastricht treaty as "the gospel which has to be obeyed without any modification."

The treaty imposes the 16 countries sharing the euro currency a maximum limit for their budget deficit and the overall debt burden.

"Now these countries are expected to return to the Maastricht criteria even if such a move sets in motion a deflationary spiral," he said in a speech at Berlin's Humboldt University.

He warned that it is hard to predict how anger and frustration will express themselves in the affected countries.

"In a worst case scenario that could undermine democracy and paralyze or even destroy the European Union," he said. The wide range of possible negative consequences will weigh heavily on the financial markets, he predicted.

Soros, a 79-year old hedge fund manager and philanthropist, urged governments to pursue a more expansive fiscal policy and to recapitalize Europe's banks to prevent a repeat of the crisis.

He also suggested that the European Central Bank should offset the budget tightening by loosening its monetary policy by, for instance, propping up its program to directly buy government bonds "from countries that cannot borrow from the market at reasonable rates."

Soros gained world-wide attention in the early 1990s by speculating against the British pound, which eventually forced the Bank of England to exit the European Exchange Rate Mechanism and made him an estimated $1 billion richer.

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Billionaire investor George Soros said Germany's insistence on fiscal tightening could initiate a deflationary spiral and may ultimately endanger the European Union as a whole.Forcing Europe's governments to slash its budgets could push the continent into a period of...
EU,Germany,Financial,Crisis
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2010-50-24
Thursday, 24 Jun 2010 07:50 AM
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