Few people have better understood the Euro crisis than George Soros.  From the start Soros has seen this as a currency currency resulting from the lack of political unity and an incomplete union.  In a speech over the weekend Soros summed up the problems in Europe in 2 paragraphs:

“The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.

But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.”

Soros says Germany must resolve the crisis and that time is running out.  He’s dead right. As I mentioned a few weeks ago Germany must make concessions here or let the entire Euro project begin to unravel.  There is simply no middle ground here.  It’s either a move towards fiscal union or full break-up.  It’s time for all of us to stop debating why this crisis won’t end and for the leaders in Europe to actually come to a workable long-term solution.  They’re holding the entire world hostage due to a lack of political unity….



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Cullen,

    There have been reports out this weekend detailing Germany’s growing willinness to accept Euro bonds if other countries accept giving up their fiscal sovereignty, but German officials believe it will take five to ten years… your opinion, will a committemt to even a long term integration project be enough for the ECB to support a ECB-financed ESM recap plan? If not, what is going to force action and what will that action be?

  2. What a fascinating situation, where that which is an economic necessity is a political impossibility. It truly is a trap.

    The only way out is with a Nor-Euro and a Sur-Euro, with France left to make the tough decision with respect to which to adopt.

  3. I can’t tell if the reports of Ze Germans giving in to fiscal union are just trial balloons or the real thing. But based on recent history, you should expect some kind of massive government intervention when things are right at the brink of disaster. The ECB will let the can roll right to the edge of the cliff and then kick it back up the hill. It might cause huge stock rallies after precipitous declines.

  4. Splitting the Euro into two is a stupid solution. They would be better off dissolving the Euro entirely, or just Germany pulling out and letting the rest of them print money to infinity.

  5. Cullen,

    I cannot agree more with the end game here, however you seem to focus a bit too much on the Germans, saying that their hand must be forced through increased political pressure from the South. It is true, however there needs to be a compromise. Germany is right to hold its ground regarding euro bonds, bailouts or rescue schemes by the ECB. If they show the credit card before anyone (France, Italy, Ireland, Portugal, etc…) accepts deeper European fiscal integration/more centralized fiscal authority, those who needed the money will either take too long to accept fiscal integration or simply not go through with it once they have what they want. Rajoy in Spain has recently announced he is ready to cede sovereignty to European authorities, but everyone else needs to follow. And fiscal integration will not be decided by the political leaders but by the people! Do you see where I am going with this? Tell the French (and everyone else in Europe for that matter) they need to retire at 67 and not 60, tell them to all follow the German model, to reform their inflexible job/employing regulations, tell them to ease job creation processes via less pressure on private companies etc…(everything the Germans are the only ones to want in Europe). Rajoy, in Spain complies more easily b/c he wants his country to survive and avoid a banking meltdown, but the people have not said a word yet. And I have not yet heard any other political leader in Europe follow his example, I do not expect them to. What do you think is going to happen when Hollande will have to tell the French people all his campaign has actually nothing to do with the new European project?
    This sets the precedent for a lot of trouble ahead, trouble that would/(will?) heighten the odds of a break up by quite a lot.
    I am not optimistic as you can see, and I like to acknowledge the fact that the Germans WANT fiscal unity, only under the condition where there is clear loss of sovereignty by member states and not just promises. Eurobonds are THE big deal, it is not something you give the go ahead just because markets or some countries are pressuring you. This is Germany’s future as well, and if they have to endure the damage of sharing funding costs and competitiveness rebalancing (higher inflation), they need to be sure that everyone is on the same boat. Can anyone be sure of that as of today? NO. Eurobonds or ECB QE will not exist as long as you don’t hear explicitly from every European president/PM that they accept fiscal integration and cede part/much of their fiscal sovereignty.
    This is a monumental mess.

    Love you site, as always.

  6. As always when writing about Europe, people reveal their ignorance. Italy did a pension reform and now italians will retire at 67 like in Sweden BUT with a much lower pension on average. This means that the the future liabilities are by far the smallest in the western world, on the contray Great Britain, US, France and others have still to start to discuss the argument. But, italians 10y are underwater. Markets do not look at fundamentals but just at how to make money now. So stop writing about things you don’t know and more about the persistent unwillingness to make any form, even mild, to financial market reform. You’re living hostage of a bankrupt financialized world and it seems you are happy with it.

  7. It gets a bit boring to read variants of what Germany must do, w/o any eception at the end of the day each proposal boils down to always the same: to transfer limitless amounts of her taxpayer’s money, forever.

    Please face reality: Germany can’t save the EMU. It is to big to be resuced.

  8. Since Soros had a front row seat to the ERM crisis he knows that the Euro will break for the same reasons. He is outlining what will be required to save the Euro, but he knows deeps down Europe won’t do it; not in 1992 nor in 2012 or 2022.

  9. OK, just imagine US politicans in charge of solving the Euro crisis. Would it happen? Not a chance. And so it won’t happen in Europe either because you have polticians from various countries that have to agee on something when in the US we have only 2 parties and even those can never find a solution or compromise.

  10. I couldn’t agree more Alberto,

    The same goes for this entire post. Sorros was a brilliant macro manager and a savvy trader, probably one of the best ever, no one is arguing that, but he is an old men and his ideas are still reflecting the perspective he had 20 years ago. Same for Cullen, he cannot imagine another system for Europe than the one he knows and somewhat understands, the American one, therefore he pushes his wishes for Europe to copy the US without trying to think outside the box.
    This is a news and dire situation, one that will require either an unusual solution or will require a lot of time. So far, they are still buying time in Europe (at an expensive price) but if they are willing to take the pain, no doubt they will come out of this stronger.
    Unfortunately, the odds are against them and sooner or later some populist politician will exploit the situation for its own benefits.

  11. You still backin up the truck on equities BJM?

    Or, if we get a sharp, few % retracement rally over the next few days you going to be unloading?

  12. TO continue on the Euor issue. Is the eurozone really that different from the US? In the US states are supposed to balance the budget. But many don’t- California, Illinois? How are they differnt from Greece? They also issue bonds to cover the shortfall. And the things get really ugly and they can’t issuebopnds then the federal govenment will assume responsibility, i.e. will print a whole bunch of follars to cover the shortfall. Eurozone has ECB which should provide the same guarantees.
    The fiscal union is not really necessary because even in the US the federal taxes don’t provide for the states neeeds . States collect their own taxes which cover their biggest expenses.
    When it comes down to it the only thing that is not working in the Eurozone is the ECB. Everything else is OK.

  13. ES – The Federal government transfers _do_ make up a significant amount of annual state budgets. There are constant transfers between states: New Mexico was receiving over $2.00 in Federal spending for every $1.00 they paid in Federal taxes. Other states, like Minnesota, Illinois, Connecticut, New York, etc typically receive less Federal spending than they pay in Federal taxes.

    Example source:

  14. PN:

    Nice link, thanks for the read!

    I wonder why Minnesota is such a loser in the fiscal transfer game?

  15. Yes, no argument there that there is a transfer between government and the states. But what do they fund mostly federall – military and big ticket social programs. States still finance most of their own commerce, educatiion, infrustructre themselves. If federal taxes were gone tomorrow states could continue OK , the only people who’d be left without support are the retirees and unemployed. US states still retain quite a lot if independence, it is not a full fiscal union and that is what my point was. Europe doesn’t need to be a full fiscal union to survive.

  16. In other words, the Eurozone needs to develop its own, unique form of federalism if it is to progress toward increased unification. This is part of the longer term structural issue that gets obscured by immediate crises and reactive ‘can-kicking’.

    Would a Euroxone Constitutional Convention be a realistic approach?

  17. A political union is a huge step, like getting married. The terms of the union need to be carefully thought out, debated until they are clearly understood and agreed upon by all. To enter into a quickly tossed-together political union in hopes of saving a deeply flawed monetary union would be the height of folly. As the saying goes: “Marry in haste, repent at leisure.”

    Europe was doing fine before the euro. Going back to national currencies or perhaps currency blocs wouldn’t be a disaster. It is true that German exports soared because of the euro. But those exports were paid for with borrowed money and it is now clear that the countries receiving the exports are unable and/or unwilling to pay for them. So in the end they will be paid for by German savers and German taxpayers. The current euro system makes no sense and needs to be shut down, not patched up and allowed to do even more damage.

  18. Why should Germany pay the price and bail out the others? It is time to end the Euro. It is OK to have a common currency but not when you have uncontrolled budgets that the determine the value of the currency for everyone. To think that will work is living in a land of fantasy, which is where Europe is right now.

  19. Netherlands, Finland and Austria as well as Spain (yes Spain) dont want to print money to infinity.

  20. Germany is simply too weak to save Europe. Thats all.

    The doomsaying about the Euro is really getting boring. Rather later than sooner a shot from Draghis “Dicke Bertha” (*) will come and stop the doomsaying for a while.

    Until then I will sit comfortably on cash and my huge short position, which I bought 4th of May just befor the employment data last month.

    (*)”Dicke Bertha” is that kind of instrument and much stronger than US bazookas ;).

  21. The sad fact is that, although there are many opinions about how to save whoever is trouble (EU, California, Greece, etc.) humans have once again created the financial circumstances where we have no choice but to go through a global depression. I do not believe that there is any way to avoid it. So, instead of rearranging the chairs on the deck of the Titanic, we should do our best to minimize the pain, and, once again create the rules that prevent this from happening again. Of course, future generations, not having gone through this, will break those rules and we will repeat this over and over for as long as humans have a financial system.

  22. K and A, you are entitled to your opinions. I’d therefore like you to go further with them and discuss what “systems” for Europe you feel are going to unfold if you do not believe in those ideas being discussed…

  23. Indeed… I’ve heard Soros saying when discussing his very famous trade in 1992 that he knew he needed to follow Germany. Just like now there were all sorts of different opinions and ideas – he realised that Germany’s was the one that mattered.

    What’s that saying? – “history doesn’t repeat but if often rhymes”

  24. Over two decades ago, predicting the collapse of the British pound, George Soros made roughly one billion dollar in one week and made envious many others, who did not. Was he just lucky or had foresight and vision? Did he lose it all, like many lottery winner, or rather multiplied it ever since? His record speaks in his behalf. His lucky week may come again. To help us, he pointed out the death cross on the newborn: Counting on an impossible political union and allowing for unabated and in-backed bond accumulation by banks, whose governments conceded fiscal sovereignty. Apparently, Dr. Soros understands the importance and role of time in currency valuation more than most of us (Soros-Conjecture.Info). The Euro helped Germany until now. It may be Germany and not Greece, whose best interest is to leave soon. If Germany leaves, Greece don’t have to.

  25. Interesting that the Bearishness only comes out after the Euro has broken… once again! Remember this on the next rally…. if there is one!

  26. Having spent the first 42 years of my life in Minnesota, I feel somewhat qualified to answer your question. As you know or may have guessed, the ancestry of most Minnesotans is Scandinavian. Although somewhat taciturn, they have a strong work ethic and modest egos. Basically, they are “nice” people. And you know what happens to nice people.

  27. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive


    Credit drives asset inflation when it goes into housing/land. Supply and demand don’t work on land and housing, which lag relative to the money supply. Normally, more money should equal more demand, which then equals an increase in supply. That cannot happen with land, which is fixed. Yes, if there is more demand chasing regular market type items, then those items will soon appear. But, with land, it is different, and it causes asset inflation. With asset inflation both prices and debt go up simultaneously. All of the bubbles in history work on this principle.

    Credit bankers tend to attach land assets to the asset side of the double entry ledger. The asset inflation driven by credit money formation in turn drives more asset growth. This growth has no counterpart in real productivity, but instead is destructive. The destructiveness is a yoke on the populations by putting them in debt peonage. Soro’s himself is a bear raider who uses the money system to make his wealth. He understands the banking system because he manipulates it for personal gain.

  28. Transfer payments.
    Minnesota and other states housing high income individuals send taxes to support social security and welfare payments to southern states where there are more poor people and retirees.

  29. “As always when writing about Europe, people reveal their ignorance”

    Followed by;

    “on the contray Great Britain, US, France and others have still to start to discuss the argument. ”

    So ,if I tell you that the Uk has twice revised retiremnt age upwards in recent years from 65 to 66 and now to 67 with discussion that it may eventually rise to 73 years of age. Now will you agree that you are as equally “ignorant” ?

  30. Here’s another Soros article, which says that the Euro has only three months:

    He advocates growth to pay debts, and states it is the only way. I disagree, and please consider the source. Soros will want the system to continue so any debt’s owed to him will get paid.

    The prime directive of money is to never allow your debts to be denominated in something other than your own currency. By extension, the prime directive can be rewritten. Never allow you debts to extend outside of your legal system. This is how Germany got into hyperinflation as they owed inter-ally debts (dollars and pounds) and other debts from the Versaille treaty. Having to trade German marks for dollars allowed Bear raiders (like Soros’ ancestors) to short German currency.

    If Greece changes currency, they have to demand that their debts be within the ability of their economy to pay. Even better, they should demand that their external debts be denominated in their new currency (drachma?). In this way, they do not abrogate the prime directive of money. Not knowing the rules have allowed countries to get themselves gamed. Hopefully they won’t make the same mistakes or history will repeat continually.

  31. Bferro, I saw you marked your blog private, are you shutting down or is there any way the rest of us can get access? Thanks

  32. “(yes Spain)”

    I disagree with the hyperbole, but over the last 40 years Spain solution has always been inflationary. What has changed?