GREGOR PETER SCHMITZ: This book deals with the problematic present and the difficult future of the European Union (EU). That union, though, cannot be properly understood without a look at its historical roots—the determination to create peace in war-torn Europe. You became famous as the archetypical “American investor,” with an estimated fortune of more than $23 billion, but you remember that dark European past better than most, having grown up in a Jewish family in Hungary in the 1930s. At that time Europe was not a friendly environment for people like you.
GEORGE SOROS: There was anti-Semitism in Hungary in the 1930s, but that was nothing compared to what came afterward.
SCHMITZ: Your father changed your family name from Schwartz to Soros to make it sound less Jewish. Did your family try to shed its heritage?
SOROS: That was in 1936, which was when I started going to elementary school. It was an attempt to deemphasize our Jewish origin. We were not a religious family. I was brought up in a very liberal atmosphere. My father even contemplated changing our religion because it was a purely formal issue for us, but in the end he decided against it. He felt it would be hypocritical, as we did not believe in religion. But changing the name, making it into a Hungarian name, we felt good about that. Anti-Semitism gave my mother ulcers, but it did not bother me very much. But we were still Jewish, of course, so when I went to gymnasium in 1940, I was put in a Jewish class, and in 1943 I had my bar mitzvah.
SCHMITZ: This topic took on a whole new meaning when the Nazis invaded Hungary in 1944. Did you fear for your life then?
SOROS: Not particularly. We were under the impression the occupation would be short-lived, a few weeks or so. After all, the Nazis were in retreat everywhere and the war seemed to be coming to an end.
SCHMITZ: Instead, the Nazis stayed for twelve months and killed roughly 400,000 Jews in Budapest.
SOROS: Actually, Jews were deported mainly from the Hungarian provinces to be killed at Auschwitz. The Jewish population of Budapest fared somewhat better, largely because of the efforts of various diplomats, of whom Sweden’s Raoul Wallenberg became the most famous, to provide some protection. But, eventually, many thousands of Jews were deported from Budapest, too, and the others were put in the ghetto. During the last days of the war, a lot of them were executed by the Hungarian Arrow Cross. One day I passed two bodies hanging from a lamppost in the middle of Budapest. Affixed to one was a sign reading: “This is what happens to a Jew who hides.”
SCHMITZ: That scared you?
SOROS: Of course, yet I felt relatively safe because we were prepared. My father had foreseen what was coming and had arranged false identities for us. He saved not only the family, but also a number of other people.
SCHMITZ: How did your father organize the false papers?
SOROS: He found a peacetime forger, somebody who made a living by preparing forged documents. My father became that man’s biggest customer. Most important, the concierge of a building my father managed was grateful for the way my father had treated him over the years and offered his help. He gave us the papers of his entire family, which meant we then had a complete set of documents. My father used it quite extensively. We then forged individual documents for imaginary members of that family, and there were several people whose dates of birth differed from the others only by a few months. Therefore, there were certain pairs of people who could never be together because they were brothers or sisters with only three months between them—and that doesn’t look very correct. So, it was quite a complicated thing—who could be together with whom.
SCHMITZ: Do you remember a situation when you were in hiding in which you thought, “It’s all over. We’re going to be found out”?
SOROS: Never, although there were moments of danger, to be sure. Once I was recognized by a schoolmate in Budapest and had to move to a different location. The very first weekend when I was on my own, separate from my family and living with a false identity, I went for a walk, and without realizing it, I left the perimeter of Budapest. There was a police patrol asking for identification and this was my first experience using false papers. So, yes, I was pretty scared. But while I was aware of the dangers, I was also confident that I would survive. Of course, had I been caught, I would have perished.
SCHMITZ: “I would have perished.” That sounds so matter of fact. One almost gets the impression that that year in the underground was one big adventure for you.
SOROS: It was. In fact, 1944 was the formative experience of my life. The important and paradoxical point is that it was the happiest year of my life. This is a strange, almost offensive thing to say because of course it was a horrible and tragic time for most people. But, I was fourteen years old. I had a father I adored, who was in command of the situation, who knew what to do, and who helped others. We were in mortal danger, but we were on the side of the angels. When you are fourteen years old, you believe that you can’t really be hurt, and I was living through the most exciting adventure that one could possibly ask for. I learned the art of survival from a grand master. I loved my father deeply and was extremely happy to be able to spend so much time with him. That experience shaped my behavior for the rest of my life.
SCHMITZ: What did your father teach you during that time?
SOROS: That there are exceptional times during which the normal rules don’t apply, and if you abide by those rules, you may perish. He was a lawyer by training but really took this lesson to heart—you have to take your fate into your own hands, and that’s what my father did in World War II. He learned that in World War I. He was a prisoner of war in a Siberian camp. There, he organized a breakout of prisoners; they fled across the taiga and lived through the Russian Revolution. That was the formative experience of his life, and he told me about it in small installments. We used to meet daily after school in the swimming pool. My father’s experience in World War I shaped his actions in World War II, and, of course, my experience under his guidance shaped my subsequent character and behavior, both as an investor and as a human being.
SCHMITZ: How so?
SOROS: Well, primarily, in making me realize that it’s better to confront harsh reality than to passively submit to it, and it may be safer to take a risk than to avoid it. We are seeing this in Europe right now, where political leaders tend to downplay the severity of the current crisis and kick problems down the road. I am energized by emergencies. I tend to anticipate the worst, think creatively, and find a better outcome. I learned that from my father. When the Nazis invaded Hungary, my father knew immediately that we had to adopt false identities and disappear, so he started working on it right away. I became “János Kis,” as my forged passport said. That is what saved our lives.
SCHMITZ: You described in your memoirs that other Jewish citizens in Budapest told you at that time: “We are still going to comply with the law because we are law-abiding citizens.”
SOROS: There was one particular experience that stood out. All Jewish students in Budapest were ordered to work for the Jewish Council. My first job was to deliver notices to a list of people, which turned out to be a list of Jewish lawyers. The notice ordered them to report to the Rabbinical Seminary with clothing, a blanket, and food for twenty-four hours. I took the notices to my father, who told me to deliver the notices, but tell the people that if they report, they will be deported. One lawyer said to me, “I’ve been a law-abiding citizen all my life, and therefore, I should be safe if I report.” And, of course, he wasn’t. That incident made a lasting impression on me.
SCHMITZ: I understand your reaction. Then again, the rule of law is a cornerstone of every functioning society.
SOROS: It is. And promoting the rule of law is one of the cornerstones of my philanthropy. But when the rules are wrong, they must be changed or broken. Right now, for example, the European authorities are biding by antiquated treaties and causing a lot of unnecessary suffering.
SCHMITZ: What was your view of Germans at that time?
SOROS: My father drew a very sharp distinction between the Nazi regime and the German people, which meant he did not hold people personally responsible for the regime. Again, in that respect, I had a memorable experience. My father used to spend his days in a café even when he was in hiding, and he was a very outgoing person. He befriended strangers, and one day he actually made friends with a German officer.
SCHMITZ: That was while you were in hiding?
SOROS: Oh, yes. But instead of hiding, my father hung out in public because he considered that safer.
SCHMITZ: Were you with him in the café when he befriended the officer?
SOROS: I was. We used to meet there regularly. This officer, who was a pharmacist in Breslau in civilian life, complained to my father how unhappy he was because of his duties. My father consoled him, saying that he was only carrying out his duties, so he should not feel bad about it as long as he was doing his best to help people rather than to hurt them. It was an ironic situation for a Jew in hiding to be consoling a German officer.
SCHMITZ: Did you understand at that time what your father was doing?
SOROS: Of course. I absorbed his values, not uncritically, because one of his values was to be critical and not to follow instructions slavishly. But this particular episode keeps coming to my mind when I look at my own efforts to persuade Germany to change its policies. I don’t want Germans to become objects of hatred in the rest of Europe again.
SCHMITZ: When the war was over, after you had survived, what were your expectations for Europe? Did you even think it was possible that there would ever be lasting peace?
SOROS: It was a period of reconstruction and revival and there was the Marshall Plan. The Marshall Plan led to the European Union because it was not only assisting individual countries; it was setting up mechanisms for cooperation, reopening commerce, and building a European economy. It was probably the most successful example ever of official development assistance. And it showed the benevolent side of America, which held a hegemonic position in Europe similar to the position that Germany holds today. The difference is that the Americans embarked on the Marshall Plan and debt forgiveness, whereas Germany today insists on the full payment of debts without offering any similar plans for Europe’s economic revival and political reconstruction.
SCHMITZ: Initially, though, not everyone in the United States was so generous. The Morgenthau plan aimed for the deindustrialization of Germany. Did you sympathize with the desire to keep Germany down after the horrors of the Holocaust?
SOROS: No. My father was an Esperantist and a believer in international cooperation. I grew up in that spirit. It was the obvious way to go, and the idea of vengeance or retribution was emotionally alien to us. As a student at the London School of Economics (LSE) in the early 1950s, I pursued that inherited interest and studied past attempts at international cooperation—the League of Nations, customs unions, commodity buffer schemes, John Maynard Keynes, Bretton Woods, and so on.
SCHMITZ: In 1956, you left Europe to go to New York City. Did you feel you could succeed more easily in the United States?
SOROS: When you don’t have any money, you worry about it a lot. That was the time of the dollar gap, and I wanted to close my own dollar gap by going to New York. It may sound silly now, but I actually had a five-year plan—very popular in Soviet times. My aim was to go to America and make a fortune of $100,000 and then come back to England and devote myself to philosophy. That was my five-year plan, and I actually exceeded it. I made more than $100,000.
SCHMITZ: But you stayed on.
SOROS: I got caught up in the money-making game and went on to make a fortune. However, the financial markets also turned out to be a great laboratory for putting my philosophical theories to a practical test.
SCHMITZ: So you changed your plan—but you maintained your interest in Europe?
SOROS: Very much so. The European Union is in my view the shining example of an open and free society. That is why the current crisis is so personal to me. I am very concerned about Europe’s future and the potential dissolution of its open society. In the run-up to World War I or in the Weimar Republic, people did not think all those terrible things that followed could happen. But I have a particular sensitivity to these matters, because I lived under both Nazi and Soviet occupation. And I would hate to see a repeat of dark times in Europe.
SCHMITZ: When you met with European leaders over the decades, did they share your perspective?
SOROS: In 1989, I spent an extended period in Germany and met with a number of German politicians and public figures, and they unanimously proclaimed that Germany had no independent foreign policy, only a European policy. That was the refrain of all those conversations. Of course, Germany was at that time, along with France, at the forefront of European integration. It was a farsighted vision, that Germany could be reunited only in the context of a united Europe. Helmut Kohl was willing to make considerable sacrifices to achieve reunification. At the same time, President Mitterrand and the French political establishment—and I had a number of conversations with the French political elite at that time—were pretty unanimous in recognizing that France had no chance to remain a world power without being closely associated with Germany, because Germany could expand eastward but France could not expand southward. So it’s those two motivations that gave the impetus to a greatly accelerated process of European integration.
SCHMITZ: Helmut Kohl sometimes referred to himself as the direct successor to Adolf Hitler because he was the first chancellor of the reunited Germany.
SOROS: The French were also using Nazi terminology when they spoke of a “Lebensraum.”
SCHMITZ: When you spoke to leaders in France, Great Britain, or Germany, how often did that specter of the past come up?
SOROS: That generation of Germans was weighed down by an overwhelming sense of guilt for the atrocities committed by the Hitler regime. That was why Germany wanted to subordinate itself to a European political union in order to escape even the possibility of a repetition. This was the motivating factor in a genuine desire not to dominate. And I think that attitude is still very strong in Germany today. Germany does not want to dominate Europe, but the willingness to make sacrifices has disappeared. At that time, Germany was always willing to give a little more, and take a little less. That is what made the process of integration so successful for a time.
SCHMITZ: Do you remember when that attitude began to change among German politicians?
SOROS: The impulse for closer integration culminated with the German reunification and the introduction of the euro. In a way, the euro was the price that François Mitterrand demanded for supporting reunification, so it was a deal between Kohl and Mitterrand, that in exchange for French support, Germany would agree to a common currency.
When both of these goals were achieved, conditions changed. Reunification turned out to be very expensive for Germany, because the economy in the East was barely functioning. Germany became weighed down by very heavy debts and had to tighten its belt. So the generosity that promoted the process of integration disappeared.
SCHMITZ: What did you think of the euro when it was announced? You said it was the price to pay, but from the perspective of an investor, was the price too high?
SOROS: I was a great supporter of the euro, although I recognized, as others did, that it was an incomplete currency. It was a monetary union without a political union. The euro had a central bank, but not a common treasury. I think that was obvious to everyone. But remember that the introduction of the common currency was meant to be a step toward further integration. The process of creating the European Union was an exercise in what Karl Popper called “piecemeal social engineering”—taking a small step, setting a particular target and timetable, then generating public support for that step, knowing full well that it will necessitate further steps. That is how the European Steel and Coal Community was transformed into the European Union step by step.
SCHMITZ: The British historian Timothy Garton Ash wrote in Foreign Affairs that the whole process of piecemeal unification in Europe began to fall apart when the euro was introduced because it was so structurally flawed. Would you agree?
SOROS: Only in retrospect. At that time, I regarded it as a step in the right direction. Then the reunification of Germany and the introduction of the euro was followed by a period of digestion. During this period, the financial system of Europe became more integrated into the global financial system. That made it vulnerable to the financial crisis of 2007–2008 that originated in the United States. Because of the globalization of financial markets, that crisis actually caused greater losses for the European financial institutions than for the Americans because the unsound, toxic, and synthetic instruments had found a better market in Europe than in America.
SCHMITZ: When the euro was introduced, what was the perception of your fellow investors in the United States?
SOROS: There were critical voices, but on the whole, the euro managed to establish itself and gain confidence. It seemed to fit into the global integration of financial markets. The financial authorities in Europe did not recognize the most serious, fatal flaw in the euro, and neither did I or my fellow fund managers.
None of us realized that when the individual member countries transferred their right to print money to the European Central Bank (ECB), their government bonds became denominated in a currency that they did not control. They controlled the currency as a group but not individually. That put them in the same position as Third World countries that were borrowing in dollars or in euros. That meant that they ran the risk of default. As long as you can print money, you have no reason to default because you can always service your debt; so the risk of default is absent. But when you are borrowing in a foreign currency, there is that risk, and it was ignored both by the authorities and by the financial markets.
SCHMITZ: Do you recall any conversations with other investors who foresaw that risk at that time?
SOROS: No. The problem did not seem to be of practical significance because the financial authorities made the rules and the rules declared government bonds to be riskless. The European Central Bank accepted the government debt of all the member countries at its discount window on equal terms, and the European banking authorities did not require commercial banks to put aside any of their own equity for the risk involved in holding government bonds. And that created a perverse incentive for commercial banks to invest in government bonds and buy the bonds of the weaker countries that paid higher rates of interest in order to earn a higher profit margin because they could then take those bonds to the ECB and borrow 100 percent against them. The banking authorities considered that a riskless transaction, so the banks could invest an infinite amount. That led the interest rates of the various government bonds to converge. By that time, we were a little suspicious of the extent of the convergence, but we did not dare to speculate against it as long as the European Central Bank was willing to discount those bonds on equal terms. So we observed the convergence, but we had no reason to believe that it would be reversed.
SCHMITZ: Were you tempted to speculate against the euro?
SOROS: We were more inclined to go with the trend that kept the euro overvalued. Central banks and sovereign wealth funds, which have a much bigger influence on exchange rates than short-term speculators, were accumulating euros. Keep in mind, the creation of the euro greatly reduced the scope for currency speculation because it reduced the number of currencies in which one could trade. That did not turn me against the euro, however, because I considered it to be a very desirable political project, and I thought that I could certainly find other ways of making money.
SCHMITZ: We spoke about the sense of history in Europe. If you look at the current crisis, would a person like Helmut Kohl, who lived through World War II, have handled this crisis differently than Angela Merkel, who lacks that experience?
SOROS: Yes, I think so. Remember, the big break came after the bankruptcy of Lehman Brothers in September 2008, when financial markets were on the verge of a meltdown and the financial authorities had to reassure the markets by saying that they would not allow any other systemically important bank to fail. This happened in October. The finance ministers of the European countries left the International Monetary Fund (IMF) conference in Washington a day early and met in Paris and made this reassuring declaration about protecting all their important banks. But, subsequently, Chancellor Merkel insisted that the guarantee should be given by each country individually, not by the European Union collectively—thereby severely undermining the guarantee. In saying that, she was reading the prevailing German public opinion correctly, because there had been this radical shift in sentiment where Germany no longer wanted to be the deep pocket of Europe and was concerned about the extent of its own debt.
SCHMITZ: Kohl would have handled it differently?
SOROS: Probably he would have used the opportunity to take EU integration a step further by converting the debt of individual countries into eurobonds. That would have avoided the euro crisis. After Merkel’s statement that each country had to stand by its own banking system, the panic briefly subsided, but eventually the markets discovered the key flaw in the euro: the real danger that individual governments can default because their debt is not guaranteed by all members of the eurozone. Individual countries were not strong enough to support their banks with huge guarantees. The absence of a credible European bank guarantee was a major contributor to the euro crisis.
SCHMITZ: Was that because Merkel no longer saw the European Union as a matter of war and peace as previous leaders in Germany did?
SOROS: Not necessarily. She has made it clear that the euro is here to stay, that Germany is committed to the euro. At the same time, she has also made it clear that Germany doesn’t want to be the deep pocket to sustain the euro and therefore is only willing to do the absolute minimum that is necessary to preserve the euro.
There is an internal contradiction in that position. On the one hand, you have a deeply felt commitment to the euro, but there is also a very strong determination to take on as few liabilities as possible in making the euro work. This internal contradiction is at the root of the euro crisis. It means that the creditor countries, such as Germany, provide support to the weak ones extremely reluctantly and keep it at an absolute minimum. This pushes the heavily indebted countries into a deflationary trap. Cutting the budget at a time of insufficient demand reduces demand even further, because the governments have to impose drastic cuts in public spending instead of providing unemployment benefits and a real safety net. The social safety net—which was the pride of the European Union in the past—doesn’t work, just when you need it the most.
SCHMITZ: Are you saying that Germany’s leadership runs counter to the whole premise behind the European unification process, which was built on cooperation rather than domination?
SOROS: Yes. And that creates two problems, one political and the other financial. The political problem is that the European Union that was meant to be a voluntary association of equal states has been converted into a relationship between creditors and debtors where, when debtors are unable to pay, the creditors dictate the terms. That gives the creditors much greater influence over the policies of the debtor countries than the debtors have on the policies of the creditor countries.
The financial problem is that Germany, in order to keep its liabilities to a minimum, forces the debtor countries to balance their budgets, which is the wrong policy at a time of insufficient demand, when you should be stimulating the economy.
SCHMITZ: In the past, “more Europe“ almost always meant more economic progress, particularly in the poorer countries of the continent, and now it is associated with austerity, cutbacks, high unemployment.
SOROS: Even worse: the prospect is for long-lasting stagnation. That is my main concern and worry. Europe, which is in many ways the most developed part of the world—and the biggest influence on the rest of the world as the cradle of our global civilization—is in a state of economic and political disintegration. Many nations have gone through long periods of stagnation and survived. Latin America suffered a lost decade in the banking crisis of the 1980s. Japan is just now trying to break out of a quarter century of stagnation. But the European Union is not a nation; it is a voluntary and incomplete association of nations that may not survive a long period of stagnation. Moreover, this dismal prospect is portrayed as inevitable, although it could easily be escaped. That is a nightmare, where you are caught up in a situation that seems inescapable and yet all you have to do is wake up.
SCHMITZ: How could you escape it?
SOROS: All you have to do is recognize that the rules that govern the euro are no longer appropriate and need to be changed. During the period of European integration, the rules of the European Union were subject to continuing change and revision and improvement. Instead of that, a patently flawed set of rules has now become immutable because any treaty change has become inconceivable.
SCHMITZ: You mean to say it would be rejected?
SOROS: It’s worse than that. Europe’s leaders—especially Chancellor Merkel—are not even willing to consider any solutions that don’t fit into the existing treaties. If they did, they could build a strong case that could make a treaty change politically possible and even popular.
Having studied the issue very closely, I see two alternatives. Either of which would be preferable to the prevailing state of affairs. One is that Germany would accept its dominant position and the responsibilities and liabilities that go with it, in which case Germany would become a benevolent imperial power in Europe, similar to the United States after World War II. The other alternative is for Germany to leave the euro and thereby allow the rest of Europe, the debtor countries, to take possession of the euro. Since the accumulated debt is denominated in euros, it makes all the difference who remains in charge of the euro. If Germany left, the euro would depreciate. Debtor countries would regain their competitiveness; their debt would diminish in real terms; and, with the ECB under their control, the threat of default would disappear.
SCHMITZ: But wouldn’t a eurozone without Germany be seen by investors as weak?
SOROS: Not at all. It would compare favorably with Britain on all recognized measures of strength, debt to gross domestic product (GDP) ratio, growth prospects, and so on. Therefore it should be able to issue bonds at interest rates similar to British gilts.
The creditor countries would incur losses on their claims and investments denominated in euros and encounter stiffer competition at home from other eurozone members. The extent of creditor countries’ losses would depend on the extent of the depreciation, giving them an incentive to keep the depreciation within bounds. That should insure that a euro without Germany would be a stable currency.
This would be a big shock for Germany, but it would be a big relief for the other countries. Either alternative would be preferable, even for Germany, than to continue on the current course. But that is not how Germany sees it, and therefore these alternatives cannot even be considered.
SCHMITZ: On what grounds do you say that both alternatives would be preferable even for Germany?
SOROS: The European authorities are forcing all those who find current policies intolerable into anti-European and anti-German attitudes. The rise of anti-European political movements—Beppe Grillo, Marine Le Pen, the UK Independence Party (UKIP), Golden Dawn, you name it—may eventually lead to the breakup of the European Union. I am convinced that is not what Chancellor Merkel or the large majority of Germans want. So it would be important to distinguish between the euro and the European Union and to realize that the euro is a means to an end. And the end is to find a European solution rather than for each country to seek a national solution. We need somehow to recapture the original impulse that led to the creation of the union, the spirit of solidarity and cooperation. Only Germany is in a position to initiate the process.
SCHMITZ: Is that why you always single out the Germans in your criticism?
SOROS: Yes. Germany is by far the strongest power in Europe today, and with this power comes responsibility. Only Germany can end the nightmare that afflicts Europe, because only Germany is in a position to initiate any substantial changes in policy. If any of the debtor countries tried to do so, they would only provoke punishment both from the European authorities and the financial markets. So if I could manage to give a wake-up call to the German public and change public opinion there, I would consider that the crowning achievement of my life. In all other cases I was merely accelerating the tide of history; in this case I would be reversing it.