Last Monday, Nov 7th, 2011, I participated in an OSI conference on the topic of: Is populism the future of European politics? at which George Soros spoke. While today’s news is dominated by the Euro crisis, the economic down-turn it is causing and the political fall-out in the countries of the Euro zone, it was no surprise that much of Soros’ introduction focused on the Euro crises and its implications for European cohesion. As an insider in the world of finance, his analysis is interesting to share. But be aware that this text is my personal take in highlighting some points of the introduction and subsequent discussion.

Euro crises serious crises
The Euro crises is a combination of a set of crises: a banking crises, a sovereign de bt crises and, above all, a political crisis. Markets want a united response from the Euro zone. The way decision-making plays out following the recent Euro Summit,

sends the opposite signals. The EU leadership fails to address the crises adequately, taking measures which are qualified as ‘’too little too late’’. Rather than addressing the structural underlying problems of managing the Euro, the decisions aim at buying time in the hope that the crisis will be resolved at a later day. Although markets are often not right, they will not wait for a later day.

The Euro crises is triggered by the banking crises the subprime mortgage crises that caused the collapse of Lehman Brothers in September 2008. Interbank lending came to a halt and governments has no choice but to avoid a full melt-down of the economy by bailing out the banks with huge amounts of credit. By doing so, states increased their (sovereign) debts. These government debts were once seen to be risk free, but with the substantial government budget deficits in the Euro zone and the prospect for a prolonged recession, the risk of government defaults became a serious concern. Increasing interest rates to pay for government borrowing has been the result, making sovereign debts of a number of Euro zone countries unsustainable.

The prescribed medicine is to balance the budgets and to reduce the sovereign debts by austerity packages. Belts need to be tightened. But since all countries within the European Union are following this cure, it leads to reduced economic demand and to negative growth. The Euro zone economy has already slowed down to levels close to a recession, but will decrease further in the years to come if this policy continues to be pursued. In the absence of a common economic and fiscal policy in the Euro zone, austerity will become a race to the bottom in which EU countries will try to outperform each other in competitiveness. This will result in lower incomes and deflation. Latin America suffered this fate after its financial crises in 1982 (what became known as the ‘’lost decade’’) and Japan has for 20 years since 1989 suffered under stagnation and no growth. Europe may have this in store now as well.

Ever more integration of EU now in reverse drive
The European Union was established as an ideal, as the embodiment of an open society. As an association under one umbrella of minority countries. Not one country has the majority within the EU. The approach to build the European construct was through peace meal social engineering (concept of Carl Proopper), a step by step approach to ever increasing integration (or union). Following the unification of Germany, the integration process reached its culmination with the introduction of the Euro in 2001. The introduction of the Euro should have been followed by further steps to economic and political integration, but integration stagnated during the past years with the emphasis on widening the EU.

Also, because of a lack of a common economic and fiscal policy, economic convergence did not happen in the Euro zone, instead the reverse happened. Where Germany was forced to introduce structural reforms due to its debts incurred by the German reunification process, resulting in a strengthened export-oriented competitive position, other EU countries felt a lesser need to pursue structural reforms shielded by the low interests rates and cheap money which the use of the Euro facilitated. This bubble burst with the fall of Lehman Brothers in 2008, and so did the EU integration project which is since on course of disintegration, as George Soros sees it.

Soon after the subprime mortgage crises unfolded in the USA in late 2008, Angela Merkel stated that the banking crises should not be tackled at the European level. Each Euro zone country individually should guarantee their own banks. With this statement, she followed German public opinion instead of leading public opinion in a European approach that would ensure the stability of the Euro. She has recently, belatedly, shifted her position by stating that “without the Euro there will be no Europe”, underlining the critical importance of the Euro in keeping Europe together.

With the introduction of the Euro in 2001, the German position on the role of the European Central Bank (ECB) prevailed, meaning that the ECB mandate was limited to keeping inflation under control by focusing on price stability. Germany did not want the ECB to become a bank of ‘’last resort’’ which would, in the final analysis, be the answer to addressing the current lack of trust of the financial markets in countries within the Euro zone.

The Euro crisis is in fact undermining the cohesion within the EU. It is telling that following his substantial support to struggles for open societies in the former communist countries, in the global South, in the Arab region and in the United States itself, George Soros’ current concern for the political and economic developments in Europe has prompted him to consider Europe the new frontline for supporting the preservation of open societies. According to George Soros, the way forward is for more Europe.

Euro to stay
He is convinced that the Euro is there to stay despite the crises the Euro is facing. “You can not unscramble an omelet.” He welcomed the recent shift in the position of Angela Merkel but recognized that Germany finds itself in a European leadership position which it never really wanted. Yet it now holds the keys in taking the lead in the next steps in European integration, both economically and politically. The biggest challenge today is addressing both the EU ungovernability in tackling the root causes of the crises and the lack of legitimacy of European governance.

In his view, the cozy relationship between governments and banks need to end. The banking system should be brought under European control and no longer national control.

It takes extraordinary leadership for Europe to get out of the trap it has maneuvered itself in. “”Is there perspective? Yes, of course, we are in charge of our own destiny. Hence, we have to recapture a united Europe as a desirable goal.”