George Soros gave a thought-provoking speech the other day, providing his insights into the euro crisis. The following quotes are taken from a blog on the NPR website by Jacob Goldstein (Planet Money) as well as from the text of the speech (see www.georgesoros.com).
Soros equates the current belief system in modern economics to Newtonian physics. He states that because he is not a member of the academic environment, he never bothered to study the Efficient Market Theory. (One wonders how he can so easily discount a theory he never studied, but let's not go there--other than to say that a theory does not have to be true, or completely true, for it to offer insight and perspective.)
Here is Soros in his own words:
Instead, I should like to put before you a radically different approach to financial markets. It was inspired by Karl Popper who taught me that people’s interpretation of reality never quite corresponds to reality itself. This led me to study the relationship between the two. I found a two-way connection between the participants’ thinking and the situations in which they participate. On the one hand people seek to understand the situation; that is the cognitive function. On the other, they seek to make an impact on the situation; I call that the causative or manipulative function. The two functions connect the thinking agents and the situations in which they participate in opposite directions. In the cognitive function the situation is supposed to determine the participants’ views; in the causative function the participants’ views are supposed to determine the outcome. When both functions are at work at the same time they interfere with each other. The two functions form a circular relationship or feedback loop. I call that feedback loop reflexivity. In a reflexive situation the participants’ views cannot correspond to reality because reality is not something independently given; it is contingent on the participants’ views and decisions. The decisions, in turn, cannot be based on knowledge alone; they must contain some bias or guess work about the future because the future is contingent on the participants’ decisions.
Soros believes that his theories have gained greater acceptance since the financial crisis:
The euro crisis is particularly instructive in this regard. It demonstrates the role of misconceptions and a lack of understanding in shaping the course of history. The authorities didn’t understand the nature of the euro crisis; they thought it is a fiscal problem while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it. The crisis is still growing because of a failure to understand the dynamics of social change; policy measures that could have worked at one point in time were no longer sufficient by the time they were applied.
Soros devoted the remainder of his speech to the euro crisis:
I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.
The speech is worth reading in its entirety. I am tempted to quote all of it here, but my purpose will be better served if the readers of this blog were to go to Mr. Soros's website and read the whole thing.
Mr. Goldstein explains that euro crisis may be divided into three parts. The first part is called convergence. The weaker members of the European Union were now able to borrow at the same low rate as their more fiscally responsible counterparts. The second part is the false dream:
The euro made it easier for Germany to sell stuff to countries on the periphery of Europe, both by making German goods cheaper for people in those countries, and by making it easier for people in those countries to borrow money to buy stuff from Germany.
The third stage is the crisis itself. The notion that all the euro countries were the same came crashing down when some of the weaker countries could not pay their debt. Risk premiums went up while the value of the assets on the banks' balance sheets went down and became, as Soros describes it, "insolvent."
So given the above, does Soros believe the European Union should disband? Soros argues that Germany does not want this to happen. Their banks would lose a lot of money and exports will go down. But the alternative is not so appealing either; Soros argues that Germany will do the absolute minimum to keep the euro going, but no more.
I believe that we live in a world of egalitarianism. We want everyone to be equal. We want everyone to be the same, with the same interchangeable ideas and beliefs and abilities. (Of course these interchangeable beliefs, in my case, would be my own.) Everyone should own a home. Everyone should use the same currency. (I can hear the lyrics of the John Lennon classic, Imagine, softly playing in the background.)
The ugly truth is that we are not the same. The goal should be to better accept and appreciate our differences instead of trying to make everyone else into carbon copies of ourselves.
Yes, and these differences are called culture. When I lived in Spain, I often wondered how countries like Germany and Austria entered into a political and economic union with countries like Spain and Greece. They are simply too different.
I think the fact that American's are able to celebrate differences is one of the reasons why our country is so successful. In Spain, being different scares people; as a company, you want to hire your family, your friends, and your friends family. This way you know that the person is similar to you, and will "fit in." In the US, being different excites people; as a company, you want to hire someone who will get the job done, even if they might have a completely different personality and interests.
I just want to say that, before I read the first quote in the op, I called that he would metion Karl Popper and "reflexivity."
Burgundy and go..., wish I had a +1 for you. This kind of cronyism is rampant throughout Europe. The EU is supposed to allow for workers to cross borders freely without any special visas or permits but how many young Germans are working for Spanish startups. In the US, people from different states move all the time in search of better opportunity, but I am guessing that is not happening much in the EU.
As far as explaining the crisis, the whole thing was broken from the start. He is right about competitiveness being the core issue. Normally, when an economy loses competitiveness in relation to its neighbors and trading partners, demand for its goods and services goes down and this causes its currency to depreciate relative to those other country's currencies. This form of devaluation makes the country's exports less expensive, thus increasing demand and increasing competitiveness. The reason this has not happened in the EMU is because of the common currency itself. The PIIGS cannot devalue and are stuck in this death spiral that they cannot get themselves out of.
They caused it by not 'playing by the rules' of the EMU, but it was also caused by the fact that these countries have NEVER been able to compete with the EMU's core countries. The fact that the EMU was not initially set up with some type of fiscal union, as well as enforcement mechanisms, is an absolute joke.
I wouldn't be too quick to pin the problems of the euro on racism/cronyism. Language is by far the biggest barrier to a currency union's success. You can't have true labor mobility without everyone speaking the same language and there's nothing sinister about that.
To go back to the example of the US, there's a pretty serious cultural rift between the Northeast/South/SoCal. I really can't see myself ever living in Atlanta or L.A. because the culture is just too different. But that doesn't mean I wouldn't hire some dude from there, so long as he can speak English.
I wasn't trying to say that those countries are racist/cronyism. In Spain, it would be considered in bad taste if you hired a random person over someone you were familiar with. It is simply their culture. They have high uncertainty avoidance. Check into Geert Hofsteede's research. He analyzed many countries based on five cultural traits. The difference between European countries is extremely surprising and the difference between certain European countries is dramatically larger than cultural differences within the US.
one's happiness is another's misery. enough said. This is reality.
I don't see what the last two paragraphs in the original post have to do with the Euro Crisis.
Before we heap all of the blame on the different cultures, lets rewind and see what lessons we should have already learnt. Europe already had a failed experiment with the ERM. If you don't know what that is check out Bank of England Vs. Soros in '92.
Labour mobility isn't the biggest issue with the Euro currency. For example, if all of the unemployed people in Spain suddenly spoke German, Swedish, English and French and got employed in other countries, Spain would still have the majority of it's issues. The same with Greece, Ireland and the other countries.
The biggest issue with the Euro is that you don't have a link between monetary and fiscal policy Europe wide.... It's not a cultural issue:
Monetary policy is centrally planned, but fiscal policy isn't. The architects of the Euro recognised this and had fiscal rules in order to co-ordinate the countries. This is a recipe for disaster. If the EuroZone could issue bonds centrally they wouldn't be in a worse off position than the US, or the UK. This is a separate issue from whether or not the EuroZone should have austerity or deficit spending or whatever. Or whether markets are efficient or reflexive. It does raise the issue of how members of the EMU would budget centrally given that the EuroZone would borrow centrally. How they would tax and how they would govern... It seems that you can't have the Euro without having a Europe wide government...
I really hate to state the obvious, but you can have an EU without a Euro (common market, labour mobility, avoid massive wars among one another, reduce tariffs, harmonised regulations, etc...). Sweden and the UK are members of the EU, but they are not members of the monetary union. They have their own currencies and set their own monetary policy. They can decide for their own whether they want to go for austerity or deficit spending or whatever. You could have a similar arrangement with the other countries. Hell, some of them could even fix their exchange rates to one another!
I don't understand why people are shocked that the cultures of European countries are different. Less than 100 years ago they massacred one another and dragged the rest of the world into that mess... twice. The fact that the cultures are different has little to do with Euro crisis. The currency was destined to fail at the first major recession because it was designed badly.
Okay well, first of all this "Euro Crisis" was not caused by the Euro or by Europe.
The direct antecedent to the possible destruction of the Euro zone is the American Financial Crisis.
The entire financial crisis and the aftermath has been cast as a kind of accident. The American Financial Crisis was recast as a Global Financial Crisis, as if the liquidity crisis created by the collapse of the ABS market arrived from outer space.
The ongoing depression that resulted, comprised of a 16 month recession and output gap now four years old and counting, has been obfuscated as The Great Recession. THe cause of the recession itself, the collapse of a securitized mortgage scam, is not cited as the first link in a chain of causation that has recently led to recessions in Europe that in turn led to the near destruction of the Euro.
The chain of causation will continue on to the destruction of the IMS itself. It will never be understood by the majority of Americans, leaving them open to propaganda efforts directed at blaming no one in particular.
ProdigyOfZen, you're right, but the fact remains that the EMU is not able to cope with severe downturns, or countries pursuing incongruent fiscal policies in response to a recession or lack of liquidity because of the way it is designed. The ERM (the Euro's predecessor experiment) had similar failings, but at least then the countries had the option to stop defending their currencies and letting them float (refer to Black Wednesday) and flexibility to pursue whatever fiscal policy they choose.
How has the US survived their home grown crisis? To a large part by issuing a lot more debt at the federal level. The EuroZone doesn't have this option because it lacks a common treasury and the member states can't pursue an equivalent policy at the national level because they have to deal with a common currency and fiscal rules.
Of course the Euro was enacted as political currency not an economic one. The Euro is not federalization, there is no central bond authority or central taxing authority.
It was near impossible to implement those two factors in 1999 because member states were already skeptical. I bet Germany is wishing now they had done that back then.
The crisis now provides the political cover to enact a central taxing authority through Brussels and the creation of Euro Bonds which are coming.
The entire Euro zone debt is only 80% of GDP. When Euro bonds come they will quiet the European crisis. Perhaps Greece will end up being a sacrificial lamb.
We shall see.
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