George Soros Explains the Euro Crisis

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

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.

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