George Soros spoke in Vienna today and believes that the endgame for the Euro crisis will result in smaller nations defecting from the Euro. He said that Europeans will ultimately require a mechanism that allows for some sort of defection. Bloomberg quoted Soros as saying the crisis is developing and could result in collapse:
“I think most of us actually agree that (the Euro crisis) is actually centered around the euro… It’s a kind of financial crisis that is really developing. It’s foreseen. Most people realize it. It’s still developing. The authorities are actually engaged in buying time. And yet time is working against them.”
“We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread.”
“The financial system remains extremely vulnerable.”
Soros is one of the few who has long understood the fundamental problem in Europe. The single currency system imposes a recessionary bias on countries due to the lack of a central treasury and mechanism that can offset the inherent trade imbalance that results from the lack of floating exchange rates between differing economies. Much like the gold standard once imposed, these trade imbalances ultimately result in unsustainable debt growth via budget deficits. The Europeans MUST resolve this central weakness in the Euro or the issues will persist and emerge time and time again in the years ahead.
I still think this means one of two things – Europe must become more like a version of the USA (or a United States of Europe) or they must allow the entire EMU to crumble while reverting back to some form of independent currency systems throughout Europe that existed previously. I don’t think that’s an option at this juncture. Too much time and effort has been invested in the EMU for it to be allowed to crumble at this point. What the Europeans need to resolve is the size of this United States of Europe. I don’t doubt that Soros could be right about defections, however, that would require the acceptance that defections are likely to include defaults and serious economic disruption. For a world that is enamored with bailouts and helping bankers at all costs I find it hard to believe that the Europeans will allow such a destructive result.