SOROS: EURO CRISIS WILL RESULT IN DEFECTIONS
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.
Source: Bloomberg
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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” 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.”
You’ve put the last nail in the coffin! This is precisely what makes the European crisis such a BIG problem. Despite the high initial cost, the optimal, long-term decision is to leave the euro. All the time and effort invested [in the past] is just a sunk cost that should not be part of the analysis even though the FUTURE exit cost is. It is kind of like people who don’t exit a bad relationship because all the time and effort they have put into it.
Ah, but politics (and investing) isn’t about the way things should be, but rather how they are. Sunk cost or no, Europe’s leaders will hang onto their little project with tooth and nail. It will all come crumbling down in the end anyway.
If the USA is workable then a US of Europe would be workable. Like you said, there is no way they let it just crumble. Which means we have to move towards more unity, a Euro bond market and a Euro treasury. The big question mark of course is what that US of E looks like and whether these periphery nations are involved. I don’t see how they can’t be so personally, I’ll be surprised if German bankers allow Greece to defect. It’s not an easy situation no matter what and I still maintain that Eurozone equities and bonds simply cannot be touched right now. Gold will remain the best hedge against the misconception that the EUR represents a failure of fiat.
Man, I love this site so much, great work on all of this Cullen, keeps me very well informed.
My question is this, since fiat’s worth is based on belief, if the misconception is that fiat currency is failing, then doesn’t that make it so?
Glad to help. It’s what I always envisioned with the site.
That’s just it though – the Euro is not failing because fiat is flawed. The Euro is failing because the construction is flawed. This means we can benefit from the misconception that fiat is flawed (by understanding what other market participants are thinking), but I don’t necessarily think it will result in some sort of drastic change (such as a return to the gold standard).
Cullen,
I won’t get into my personal thoughts on the likelihood of Europe coming out of this in a firmer union.
But I was wondering if you could point the less informed (me) towards a good resource on how the ECB/Eurosystem operate. This piece was the first time I recall seeing someone point out specifically that the Euro has no central treasury.
Thanks for all your hard work.
“SOROS: EURO CRISIS WILL RESULT IN DEFECTIONS”
Translation: Soros is buying Greek debt.
Well, there’s no question that, in the short term, if they want to keep the EU and euro, then significant fringe bailouts / debt forgiveness must occur. In my opinion, the frustrating and immature politics of Europe have led to delays that have already doomed the EU/euro.
Anyway. Assuming there is a “fix” possible aside from the SDR-Euro concept, one interesting suggestion I’ve seen is that domestic credit extension should be a factor of the current account. Eurozone members would be REQUIRED to sign up to a policy of imposing restrictions to credit growth in accordance with the current account deficit. A growing deficit leads to tighter credit conditions imposed by the central bank, and vice versa. Of course, such a policy is only effective if sovereign nations are able to control their own credit environment in an environment of a common currency, meaning that the banks’ “Schengen” would have to be revoked.
For more information, get a coffee, find a few hours, get comfortable and read this: http://www.buoyanteconomies.com/CAD_Formula.htm
http://www.zerohedge.com/article/what-if-greece-says-no
Sorry Cullen
The best hedge will not be gold but the dollar.( at least for the rest of this year.)This is a liquidity crisis and gold will not do well in such a cenario.
Even Jim Rogers is buying Dollars.(and he is a perma dollar bear) This is an “all in one market” against the dollar.
Of course Sorros will buy greek bonds but not at this point. He will buy AFTER a default for 5 cents on the EURO. That is what costolany did with russian BONDS.
I’d prefer to own the USD via US Treasurys….
Toby Connor argues the US$ will rally (bottom of piece):
http://goldscents.blogspot.com/2011/06/sign-of-bear.html
…also at the top of his piece… he argues that the top in the S&P has been made as of May.
Good comment here from Randy Wray. Slightly different conclusion:
It’s a failed view: the EU is totally anti-democratic institution (just like the ECB and other failed institutions that serve the corporate interests). How the hell are we europeans supposed to support an european treasury without any political control over it?
No way, and to start with, there isn’t the social and political conditions to do it. Maybe if we were under the ruthless ruling of the British Empire we could have a chance at USE (United States of Europe), but to the contrary, we are under the ruthless ruling of the european elites in their ivory tower on Brussels and Frankfurt.
In whole Europe there is a serious lack of democracy (we, instead, have partycracy), but at least there is political control of the system, or an illusion of it. However this is not the case of EU and other failed institutions like the ECB.
“If the USA is workable then a US of Europe would be workable.”
Cullen, with all due respect, you need to brush up on European history. You comment shows you have absolutely no clue RE: Europe.
People like you would have said the same thing if I had told you that 300 years ago a bunch of Europeans were going to move to a far away land and become the largest most powerful melting pot the world has ever seen in a place called “America”.
I’ve heard all the theories about how Europeans hate each other and can’t make it work due to historical differences (and contrary to your opinion, I am extremely well versed in European history). Well, all those different people somehow managed to make it work in the USA. I am not saying it will happen overnight, but we’re moving towards at US of E. They have no choice at this point.
So Cullen would it be a safe bet to short the Euro for the short term…if soros is right about defections that would create a beahavioral short of the euro, would you agree?
I don’t really have an opinion on the EUR right now. I am bullish equities though so the risk trade is on in my opinion. Long EUR is not my favorite approach though….
Well Europe wasn’t discovered last week, it’s been around for ages. Founding a country from scratch is a fairly different thing.
I’d argue that the challenges America has overcome were even greater than the ones Europeans face. If you’d come to me 300 years ago and told me that Japanese, Mexicans, Africans and Europeans were all going to live peacefully in the same country I would have laughed in your face.
the us of e???
many different people have come to america, but they built this up piece-meal and foreigners chose to be part of your country. in europe the eu is hated by a lot of people. in elections there are voters who deliberately pick the worst candidate just to make a point; over half of eu countries have elected members of the eu parliament who are modern day nazis… the uk has two meps from a party that want to expel all ethnic minorities and ban homosexual and mixed race relationships.
whereas the USE is possible in theory, and practical considerations such as language are possible to overcome, there would be a riot to end all riots if this was attempted.
‘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…’
I’m afraid your reference to a faceless ‘they’ reveals this otherwise logical argument’s fatal flaw. Politicians and eurocrats may have erected the great Euro edifice but it has never been an overwhelmingly popular project among millions of ordinary European people. Unlike the situation in 19th century America, many of these countries have hundreds if not thousands of years of history as independent and (at various times) successful nation states. Some ran vast empires.
Cullen, this is not a trivial point. The establishment of a USE would entail these countries relinquishing their long histories as proud sovereign peoples. Such a huge change could never stand without each country validating it through a referendum. The US comparison is not valid here. Millions would passionately resist such a move.
When the crisis really accelerates, I would anticipate a powerful nationalist backlash especially among those nations being asked to suffer severe austerity. Once this happens, local politicians will quickly realize where their priorities lie and the game will be up. ‘They’ will then be in no position to decide whether monetary union crumbles or not.
Yes, core countries’ leaders may attempt to form a fiscal union among themselves, but none would be able to impose it upon their populace without a referendum. It will therefore not be ‘they’ but ordinary people who, by accepting or rejecting fiscal unity and its psychological as well as political and economic costs, will ultimately decide the euro’s fate.
For these reasons it seems to me that a USE could never be formed in an attempt to avoid an economic collapse: it will only ever come into existence as a RESULT of one.
I don’t think you can compare that at all. I’m European and I don’t know anybody who wants total Unification. The EU was forced on most of Europe, and those populations who actually got to vote for the EU Constitution many of them voted against it.
Each country in Europe has a different language and a different culture which makes economic cooperation nearly impossible.
Perhaps they could be added to our 57 states, some of which have developed distinctive languages and cultures.
Yea, I’m not sure they can pull off a US of Europe at this point. Central treasury sounds great, but the main difference between the states and Europe is the cultural homogeneity; and as a commenter or two has pointed out, the crisis over there has widened that cultural disparity more than ever.
Greece will not default because the US Fed. will step in (indirect) lender of last resort. The Fed will simply bail out the TBTFs some more and the TBTFs will end up (through their CDS positions) with the non-performing Greek paper.
We have done it before with other nations.
Jamie Dimon (JPM) just said as much this morning.
I do not think Greece will default either. Now China is in the game and wants to keep Greece from defaulting. I think there is alot more at stake then most people believe. I think the banks and especailly GS and JPM are into this alot deeper then the Euro banks are.
I am not sure how deep China is already into it. It seems like China is in deep as well. They do not come out and want to help everyone like they did unless there are some hidden reasons and that is they too are in deep.
I think all wealthy countries are in this thing very deep when you count up the total Euro’s in PIIGS. If Greece defaults the other countries may follow and that is what they are trying to contain and Greece is the experiment.
A fiscal union is impossible to sell to the European voters.
since they will not become the USA of europe for maybe a hundred years, i guess they are left with the other outcome.
I don’t think that a US of E is a likely prospect simply because the parallel with the USA breaks down in the area of language and culture. The USA was workable, despite its growing pains, because of the early-established fact that English was its dominant common language, along with the attendant cultural legacy. I don’t see western/central/southern Europe EVER coming together linguistically and culturally like that. English may be the de facto lingua franca of business, but it’ll always be a second language to most Europeans–they’re not going to be learning it, nor any other but their parents’/neighbors’ native tongue, at their mother’s breast.
The Euro does not need dated bonds , it needs zero time bonds , it needs cash.
There’s just too much unproductive debt in the system – particullary private credit.
The Base needs to explode to prevent a credit nuclear reaction.
If the script remains the same, the Greek parliament will narrowly vote for more austerity, another shot of IMF-EU cash will fill its coffers, the world will breathe a sigh of relief, and the Greeks will not adhere to the austerity they voted for. The can will be kicked down the road yet again. The Greeks know that a no vote and a possible return to the Drachma might bring Icelandic-style austerity; i.e., empty shelves, high inflation, bank failures, a credit crunch and a loss of la dolce vita. And yet, if they could tolerate eighteen months or so of such pain, they’ll be better off in the long run and la dolce vita will make a comeback. Iceland is making it work.
North Europe has a Plan B for the EURO, don’t spoil it!
Most counties around the north sea never joined the Euro.
Why not found the old sucsecfull Hanse tradae block again. Togethe with Netherlands, UK , Norway GER & Scandinavia etc we rere far more stable and successful then the Renaissance guys.
Yes, we loose 30% on the EURO exit, but we know what we got:
Real Friends & future of Northern Europe.
Probably Profit withe a strong new currency.
Take your loss. Europe was never one.
No one united EUrope last thousand years and that is it’s strength. Greece is for holidays and you should pay there with holiday fake drachma. Greek people will have a bright future as one big holiday resort with holiday currency. How they manage, the market will judge. Please be what you are and want to be.
It is reasonable th ask for a moment where to say STOP. At this moment no one tells. That is alone reason enough to leave the Euro. North Europe has a Plan B, don’t spoil it! If you do not have a serious plan, you cannot negotiate. The north has a plan B and it is even better off. This is the end of the EU. North Knows!