Tags: Soros | Merkel | eurozone | bonds

Soros: Eurozone Status Quo Is a 'Nightmare'

By    |   Wednesday, 09 October 2013 07:56 AM

The eurozone's status quo is intolerable and cannot last, charges legendary hedge fund manager George Soros.

Economists call its situation an "inferior equilibrium," Soros writes in an article for Project Syndicate.

"I call it a nightmare — one that is inflicting tremendous pain and suffering that could be easily avoided if the misconceptions and taboos that sustain it were dispelled," asserts Soros, chairman of Soros Fund Management and the Open Society Foundations.

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German Chancellor Angela Merkel kept the euro alive with as little cost to Germany as possible. So Germans handed Merkel a resounding victory at the polls, believing the euro crisis is over.

They're wrong, Soros warns. Merkel's win was a "Pyrrhic victory."

In the current setup, debtor countries get the pain. Creditors set misconceptions and taboos.

For example, Merkel declared euro bonds are taboo. But sharing risk of default is the obvious solution to the underlying cause of the euro crisis, Soros argues. Borrowing cots of indebted countries would be substantially reduced, and Germany's credit rating would not be hurt.

If outstanding government bonds, except for Greek bonds, were converted to euro bonds, each country would still service its own debt.

Debtor countries would face stricter market discipline, since they could use euro bonds only to refinance maturing bonds, he notes. "Any additional borrowing would have to be in their own name, and markets would impose penalty rates for excessive borrowing."

Everyone knows that Greece can never repay its debt, but if the "troika" — the European Central Bank, the European Commission and the International Monetary Fund — forgo debt as long as Greece meets its conditions, the country could quickly recover, Soros says.

Now is the time to act, he urges.

"Failure to seize this moment would, I believe, lead to the disintegration and eventual collapse of the European Union," Soros predicts, saying the union will not survive a decade or more of stagnation.

"Merkel cannot commit to creating euro bonds, the ultimate guarantee that the currency will need. But she should make clear that option is open, at the end of the process," states an op-ed from Bloomberg.

It does need "some system of fiscal transfers in times of crisis," it states, recommending an unemployment insurance fund.

Merkel must make it clear that Germany is committed to the euro, and all 17 eurozone countries must pool risk or the union will face perpetual risk of disintegrating, the editorial states, saying the eurozone needs a clear framework for future bailouts, a functioning banking union and debt relief for stressed member states.

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Related Stories:

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UK Telegraph: Eurozone Crisis Isn't Over

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The eurozone's status quo is intolerable and cannot last, charges legendary hedge fund manager George Soros.
Soros,Merkel,eurozone,bonds
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2013-56-09
Wednesday, 09 October 2013 07:56 AM
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