GREGOR PETER SCHMITZ: Well-known German sociologist Ulrich Beck said that Germany used to be the eager pupil in Europe, and now it acts like a strict schoolmaster. Would you agree?
GEORGE Soros: It is an apt description because the Germans want the rest of Europe to learn to be like Germany. But that is impossible. Germany has the best-performing economy in Europe today. But everybody cannot be first at the same time.
To be sure, Germany cannot be blamed for wanting a strong currency and a balanced budget. But it can be blamed for imposing its predilection on other countries that have different needs and preferences—like Procrustes in Greek mythology, who forced other people to lie in his bed and stretched them or cut off their legs to make them fit. The Procrustes bed in which the eurozone has to lie is called austerity and, ultimately, deflation.
SCHMITZ: From a German perspective, isn’t their attitude justified? The country has undergone strict reforms to become competitive again, and it has spent billions of its own dollars to bail out other nations that cheated on the eurozone criteria. Why should they not have to listen to Berlin?
SOROS: There are several reasons why Europeans don’t want to listen to advice from Berlin. Let’s start with the least important but easiest to understand: Germany’s tone, which is sometimes self-righteous and even hypocritical. Look at Germany’s own record. Germans accuse other countries of cheating on the euro stability criteria, but they forget that in 2003 Germany was among the first countries to break the eurozone rules. It is a common pattern that people can see the sins and faults of others but forget their own. And now, in the coalition agreement, Germany is raising minimum wages and pensions and permitting earlier retirement, just when it tells other countries to do the opposite. To be sure, raising the minimum wage is the right policy, but a populist rabble-rouser can easily argue that Germany is preaching austerity abroad and doing the opposite at home.
SCHMITZ: But pushing for reforms in other countries can be seen as a modern version of a Marshall Plan. Germany could serve as a role model that could show other nations how to prosper through reform.
SOROS: Now you are going too far. Your reference to the Marshall Plan reminds me of George Orwell’s Newspeak. The government does something bad and then justifies it by simply changing the name to “good.” The Marshall Plan created growth and promoted postwar reconstruction through a transfer of resources from America that included a generous cancellation of debts. The present European policy creates stagnation and discourages investment by transferring resources back to Germany and demanding repayment of debts on punitive terms.
Even when it comes to structural reforms, presenting Germany as a model is somewhat misleading. Structural reforms worked very well for Germany and have made Germany the most successful country in Europe. But what was successful in Germany before the crisis will not be successful as a prescription for the rest of Europe in the years ahead. That seems very difficult for the Germans to understand, you know, “It worked for us. Why shouldn’t it work for you?” But actually it should be quite obvious that it will not work.
SCHMITZ: Why not?
SOROS: Partly because the global economy is now very different from the time when the Schröder government undertook its reforms. Then, the rest of Europe and the world was enjoying a boom and Germany could have an export-led recovery. Now, households, banks, and governments are trying to rebuild their balance sheets worldwide. More important, what worked for one medium-sized export-driven economy such as Germany will not work for a huge economic bloc like the eurozone. Europe as a whole will always depend primarily on internal demand.
SCHMITZ: Still, wouldn’t it be better for the other euro countries to try to become more competitive?
SOROS: You’re right about that. But even while Germany rightly calls on other countries to try harder, its policy response to the euro crisis makes competitiveness more difficult, or even impossible, to achieve. The fact is that what are now called the “peripheral” countries have accumulated very large debts—and are therefore at a competitive disadvantage. And this disadvantage is becoming even more pronounced through the punitive policies currently in place. The high-risk premiums the so-called peripheral countries have to pay means that they have to spend a few extra percentage points of their GDP every year just to stay even with Germany.
SCHMITZ: Whose fault is that?
SOROS: Germans would say that it is obviously the fault of the debtor countries. But that is because in German the word Schuld has a double meaning (both “blame” and “debt”). So it is natural (selbstverständlich) to blame the debtor countries for their own misfortunes. But the truth is more complicated.
SCHMITZ: Whom do you blame?
SOROS: The introduction of the euro. Remember the fatal flaw in the euro that neither the authorities nor the markets recognized. By declaring government bonds riskless, the European authorities created a perverse incentive that caused interest rates to converge. And the convergence of interest rates caused divergence in performance. Lower interest rates in the weaker countries allowed them to enjoy a real estate, investment, and consumption boom that left them even weaker when the bubble burst. At the same time, the cost of reunification induced the Schröder government to undertake fiscal and labor market reforms that made Germany even stronger than it had been before. When the financial markets reimposed interest rate differentials, they effectively relegated the weaker countries to the status of heavily indebted Third World countries. That is how they came to be called “periphery” and Germany became the center. The periphery is now at a disadvantage that it will never be able to overcome. And to make matters worse, the weaker countries became saddled in the first decade of the euro’s existence with much more debt than a Third World country would ever have been able to accumulate.
SCHMITZ: Why should that be Germany’s fault?
SOROS: Because the euro was essentially a Franco-German project. So the excessive Schuld of the periphery countries is to a large extent Germany’s Schuld. Moreover, Germany joined an association of states. In such an association, there has to be a sense of solidarity, not just competition. As I’ve said, not everybody can be number one. If you want countries to observe mutual obligations, there has to be a quid pro quo of mutual support.
SCHMITZ: So is your criticism of Germany’s policy basically on moral grounds?
SOROS: Both on moral and intellectual grounds. Leaving aside the solidarity issue, the German emphasis on competitiveness is intellectually incoherent. Not everybody can achieve a trade surplus, because for every trade surplus, there has to be a deficit. That is simply a matter of arithmetic. So to insist that everybody should have a trade surplus is to insist on suspending the laws of arithmetic. If Germany does insist on this mathematical impossibility, it may end up destroying the European Union.
SCHMITZ: Nevertheless, nearly all economists agree that Europe cannot recover unless the countries in crisis eventually adopt a combination of austerity and reforms.
SOROS: That’s not correct at all. What you say may be true about “nearly all” economists within Germany. But outside Germany, nearly all economists believe exactly the opposite: that fiscal austerity is the wrong policy. And I would argue that it is a profound political mistake. In fact, quite a few distinguished economists inside Germany—for example, Peter Bofinger and Dennis Snower—would agree with me. We all recognize the need for structural reforms in individual countries (including more reforms in Germany itself to remove barriers to competition, particularly in services). But most economists outside Germany believe that austerity is preventing growth—and recently the US Treasury pointed out that Germany’s trade surplus reflected a weakness of domestic demand that is more destabilizing to the global economy than the policies of Japan or China. So Germans are simply wrong if they think their government leads some kind of consensus of economically responsible nations. At international gatherings such as the IMF or the Organization for Economic Cooperation and Development (OECD), Germany actually has almost no allies—and among the leading economies of the Group of Seven (G7), Germany is literally in a minority of one. Other G7 nations now unanimously recognize that the global economy is in a totally different phase from the one that prevailed when Germany was implementing its reforms and drafting the original rules of the euro.
SCHMITZ: Is it really relevant to go back in history to that point?
SOROS: I think it helps. When the EU agreed on the Maastricht Treaty in 1991, the global economy was in the early stages of a twenty-five-year boom. Then came the crash in 2008. That completely changed the economic and financial conditions. The financial markets actually collapsed, and they had to be put on artificial life support, by substituting the credit of the state for the credit of financial institutions that were temporarily insolvent. The financial authorities embarked on a delicate two-phase maneuver by injecting large amounts of credit in order to bring a financial crisis caused by an excessive growth of credit under control—like when a car is skidding, you have to turn into the direction of the skid and only when you regain control can you turn the wheel back in the direction in which you want to go. The Federal Reserve was successful in carrying out the first phase of this operation and it is only now reaching the point where it is contemplating the second phase. That’s making financial markets all around the world very nervous. But the eurozone has made very little progress even in the first phase. That is because of the fatal flaw in the euro that I have been talking about.
When Chancellor Merkel insisted that each country should take care of its own banks, she put additional pressure on the “periphery countries” that were already overextended in what was effectively a foreign currency and forced them into the same pro-cyclical policies that had caused the Great Depression of the 1930s. The rest of the world learned something from that experience, but apparently the German government did not.
SCHMITZ: I know that John Maynard Keynes, the intellectual father of a stimulus-driven economic policy, is one of your heroes. Do you think the Germans ever understood Keynes? After all, the German economy is so export driven that domestic demand was never particularly important to the Germans. Instead, we have always worried about inflation.
SOROS: You are right about Germany’s refusal to listen to Keynes. That resistance really goes back to folk memories of runaway inflation: first the traumatic experience of Weimar inflation in the early 1920s and then again in the immediate postwar years, before the creation of the deutsche mark, when the strongest currency in Germany was a pack of Camel cigarettes. So the whole philosophy of the Bundesbank was based on avoiding runaway inflation.
SCHMITZ: There was a survey last year in Germany revealing that Germans are more afraid of inflation than of life-threatening diseases.
SOROS: I am not surprised.
SCHMITZ: Isn’t that sentiment understandable? Many Germans associate the rise of Hitler with hyperinflation.
SOROS: That may be the accurate reading of German folk memory, but it is an inaccurate reading of history. It is true that hyperinflation wiped out the savings of the middle class after World War I and turned them into a Lumpenproletariat, which was a breeding ground for Nazi sympathies. But let us remember what caused the runaway inflation. It was the excessive war debt imposed on Germany by France and Britain—and the unforgiving determination of the victor nations to collect these debts. One of the tragic ironies of today’s euro crisis is that Germany is now making a similar mistake: insisting that all debts should be paid in full and imposing excessively strict austerity that is likely to backfire.
Germans should also recall what actually brought Hitler to power. It was not the Weimar hyperinflation that ended in 1923; it was the terrible unemployment that resulted from the Great Depression of 1929–1932. In 1928, the Nazis gained just 3 percent of the votes in the Reichstag, and in 1929, Erich Ludendorff got just 1.1 percent in the presidential election. It was only in 1930, after America stopped lending Germany money and unemployment jumped from 8 percent to 30 percent, that the Nazis really started gaining votes. When Germany stopped lending money to Greece, Portugal, and Spain after the 2008 crisis, their unemployment rates also jumped to around 30 percent—let us hope we don’t see similar political results.
SCHMITZ: But again: Isn’t it sensible and ultimately beneficial to ask nations such as Greece, Spain, or Italy to finally get their budgets and economies in order?
SOROS: Yes in the case of Greece, but the situation in Italy and Spain was and is emphatically different.
SCHMITZ: So you agree that the Greek government falsified its statistics to get into the euro and continued to cheat after that?
SOROS: The Greek government blatantly violated the treaties, but the other debtors generally played by the rules. Indeed, Spain and Ireland used to be held up as paragons of prudent fiscal management—their annual government deficits and their total levels of government debt were both much lower than Germany’s as recently as 2009.
SCHMITZ: But even if, as you say, some of the countries that succumbed to the crisis actually abided by the euro treaties, that is now water under the bridge. Are you saying that Germany should now pay for some of the mistakes made in designing the euro by bailing out other countries? That is against European law.
SOROS: You are right about European law. The Maastricht Treaty, which as I said was largely designed by the Bundesbank, contains a clause that expressly prohibits bailouts. And that ban has been reaffirmed by the German Constitutional Court. It is this so called no-bailout clause that has made the current situation so difficult to deal with. But this only proves that the faults revealed by the euro crisis were systemic and rooted in the history of the euro’s creation; they were not just a consequence of bad economic policies in the debtor nations.
SCHMITZ: Are you saying that the Maastricht rules are wrong and should not be enforced?
SOROS: Yes, some of the rules need to be changed.
SCHMITZ: Which specific rules?
SOROS: The bailout clause, for one.
SCHMITZ: What other clauses of the Maastricht Treaty would you change?
SOROS: The Maastricht Treaty needs a general overhaul. It was based on a false economic theory, championed mainly by the Bundesbank and the German government. The treaty took it for granted that only government borrowing could produce chronic deficits and destabilize the currency union. That was a serious mistake. Only Greece had a genuine fiscal crisis. In Spain and Ireland, the crisis was caused by housing booms and banking excesses. Italy was a special case. It was weighed down by excessive government debts inherited from the pre-euro period, which became unsustainable when markets imposed heavy risk premiums. Germany refuses to accept this, but it would be well advised to remember its own history.
SCHMITZ: What part of its history?
SOROS: Germany has benefited from debt write-downs three times in its history. The first two happened after World War I. The Dawes Plan of 1924 sought to stagger Germany’s reparations payments. The Young Plan of 1929 reduced the sum that Germany owed in reparations and gave the country much more time to pay. These debt-forgiveness plans tried to reverse the mistakes made by the victorious Allies in the Versailles Treaty. After World War I, the French and other victorious powers created economic conditions that helped fascism take root in Germany; tragically, the Germans are doing the same in Greece today, as we see from the rise of the neo-fascist movement Golden Dawn. The French insistence on payment of Germany’s post-Versailles obligations was clearly a huge mistake. Keynes was the first to point it out in his The Economic Consequences of the Peace, published in 1919.
The third and biggest debt write-down happened after World War II. The Americans and British were careful not to repeat the mistake of the previous generation and instead of seeking reparations, decided to forgive most of Germany’s debts. That came in 1953, when the allies canceled half of Germany’s debts and rescheduled the rest for very long periods (which is more or less what Greece now needs Germany to do). Without this generosity from the United States and Britain, the German economic miracle would have been completely impossible.
SCHMITZ: Do German politicians listen to you?
SOROS: Not at all, and that is very sad. I remember the days when Chancellor Helmut Kohl showed real leadership. He went to French president François Mitterrand and effectively said to him: Let’s create a stronger Europe in which the reunified Germany can be fully embedded. This gave a tremendous push to integration. But the present generation of political leaders in Berlin abandoned the historical perspective of their elders and became unabashed in pursuing what they saw as Germany’s national interest. They no longer try to be good Europeans at any price.
SCHMITZ: When you say this to leaders in Germany, do you have the feeling that anyone understands that historical background?
SOROS: Finance Minister Wolfgang Schäuble certainly does. He belongs to Helmut Kohl’s generation. He is the last true European. That makes him a tragic figure because he understands what needs to be done, but he also recognizes the obstacles that stand in the way. He has to obey the Constitutional Court. He recognizes the intellectual influence that the Bundesbank exerts on the Constitutional Court, and that forces him to follow policies that he knows in his heart to be wrong. But I admire his honesty. He was the one who announced during the elections that Greece would need another bailout. That was the only time the euro crisis entered into the election campaign.
SCHMITZ: What do you consider to be Schäuble’s biggest mistake in this crisis?
SOROS: His opposition to a genuine banking union, although I don’t know what is Schäuble’s responsibility and what is Merkel’s.
SCHMITZ: Were you saying that the Spanish and Italian governments were not guilty of overspending, that the situation was fundamentally different from Greece?
SOROS: Yes. Spain actually had a better fiscal record than Germany, with big budget surpluses throughout the pre-crisis period. Spain was also a poster child of prudent banking regulation, increasing reserve requirements as the boom progressed. Its government debt started to rise only after 2008, when Spain insisted on pursuing countercyclical fiscal policy. As for Italy, its government deficits in the ten years from 1999 to 2008 averaged 2.8 percent of GDP, well within the Maastricht Treaty limit—and in the last year before the crisis, the deficit was down to just 1.7 percent. It was the steep rise in risk premiums that made Italy’s debt unsustainable.
SCHMITZ: So in each country you have structural deficiencies, which were revealed by the crisis.
SOROS: Exactly, but the structural deficiencies are all different, so it is illogical and counterproductive to treat them all with the same medicine of budgetary austerity. The main thing all the debtor countries really have in common is that they are now in deep recessions from which they cannot escape because they are suffering from a permanent competitive disadvantage. As I’ve said already, the euro has created an uneven playing field by relegating debtors to the status of Third World countries that became overindebted in a currency they don’t control.
SCHMITZ: But you always make it sound as if Germany is to blame for other countries’ problems. Germany is the strongest country in the union, but it is not powerful enough to shoulder all responsibility alone.
SOROS: Whether German citizens and politicians like it or not, Germany is in charge of economic and financial policy. Germany cannot impose its will on the others, but no policy can even be proposed without first obtaining Germany’s permission.
SCHMITZ: The German bailout obligations already amount to far more than $200 billion, roughly 85 percent of the German tax income. They could rise much higher. At what point would you admit that even Germany is overextended?
SOROS: Numbers like these, although they are widely quoted in German public debate, are completely misleading. There is very little risk of Germany having to pay vast sums to the other countries. They have suffered practically no losses so far. The alleged transfers have actually all been in the form of loans and guarantees; it is only if the loans are not repaid or if the guarantees are called that real losses would be incurred. In the German mind, there has been no clear differentiation between cash and guarantees. Most Germans believe that hundreds of billions have already been spent. However, only some $55 billion has actually been spent on aid packages for Greece; the rest of the supposed costs to German taxpayers are just potential liabilities in the framework of the European Financial Stability Facility (ESFS) and the European Stability Mechanism (ESM). Guarantees have a peculiar character: the more comprehensive and convincing they are, the less likely they are to be invoked.
SCHMITZ: But would you agree that there is a feeling among Germans that they have done their share and the other countries haven’t, and that’s why they are so strict?
SOROS: Yes. Germany is afraid of becoming the deep pocket of Europe in a transfer union. That attitude has been fatal for the European Union. If you think about normal nation-states, every country is in some sense a “transfer union.” It is always the more-productive, more-successful parts of a country that have to support the less-developed regions. The most successful areas generally—not always—tend to be urban, and so it’s usually the urban industrialized regions that support the rural and backward regions.
SCHMITZ: So Germany is the prosperous region, and good leadership would require it to subsidize the other regions?
SOROS: Not subsidize, but equalize the cost of credit. Germany thinks it is showing good leadership by preventing a breakup of the euro and by insisting on stricter fiscal discipline. But in fact, it is not living up to its responsibilities by opposing the introduction of eurobonds. What it is really doing is the absolute minimum that is just enough to prevent a euro breakup—and always doing this at the last possible moment. Doing the minimum may prevent a collapse of the euro, but it will perpetuate a situation where debtor countries are at a permanent disadvantage. That is almost inevitable, as I’ve already said, because the debtor countries have to pay risk premiums to keep refinancing their debts, denominated in what is really a foreign currency—the euro. This puts them in the same position as the countries in Latin America after 1982, when they could not pay their debt denominated in US dollars. That led to a lost decade for Latin America, and Southern Europe now faces a similar fate. That is the reason we need eurobonds. Otherwise, we will have a Europe in which Germany is seen not as a leader but as an oppressor and exploiter. It will not be loved and admired by the rest of Europe; rather, it will be hated and resisted.
SCHMITZ: Aren’t you exaggerating? We have all seen occasional pictures of Greek demonstrators comparing Merkel to Hitler and other distasteful displays—but we have not really seen major anti-German riots anywhere in Europe.
SOROS: I am talking about what is in store. Right now, Germany still deserves the benefit of the doubt. Germany has emerged as the imperial power, the hegemon of Europe, but the German public does not want to be in that position exactly because of the painful memory of Hitler. It is in denial and is unwilling to live up to the responsibilities and, yes, the liabilities that go with being an imperial power. That turns Germany into an oppressor and exploiter without being aware of it. I consider that a tragedy—a Greek tragedy like Oedipus Rex (no pun intended)—where the perpetrator is himself a victim of his own ignorance. But with the passage of time some German politicians will discover the advantages of their current position—if they haven’t already—and they will start defending it. Then the hatred and resistance will be justified.
SCHMITZ: How could Germany avoid that fate?
SOROS: It has to learn what it means to be the first among equals. The Bretton Woods system made the United States first among equals, but it was eager for that role. That turned the country into a benevolent hegemon that earned the lasting gratitude of Europe. Germany could do the same by helping to resolve the euro crisis instead of obstructing any systemic solution, which is what it has been doing until now.
SCHMITZ: Can you give a concrete example of what you call this obstruction?
SOROS: Eurobonds are one example. Eurobonds are often compared with the Marshall Plan. Germans argue that the Marshall Plan cost America only a few percent of GDP, whereas eurobonds would cost a multiple of Germany’s GDP. That argument is comparing apples with oranges. The Marshall Plan was an actual expenditure, but eurobonds would involve only a guarantee that would never be called upon. As I have said before, guarantees have a peculiar character: the more convincing they are, the less likely they are to be invoked. To provide such a guarantee is the historic opportunity that Germany is missing by holding the heavily indebted countries to their “Schuld.”
SCHMITZ: But again, why do you emphasize the role of Germany so much? Why is Germany always expected to provide guarantees and so on?
SOROS: Because Germany is by far the most powerful country in Europe, and in a period of financial turmoil, it is the only one that is strong enough to provide the necessary guarantees. But also because up till now Germany has been the main obstacle that prevented other countries from going ahead with pan-European solutions such as eurobonds and a genuine banking union. Today, Germany does not have imperial ambitions, but paradoxically, the desire to avoid dominating Europe is part of the reason Germany has failed to rise to the occasion and behave as a benevolent hegemon. That puts before Germany a difficult choice: either lead the eurozone out of the looming depression with genuine burden sharing or leave the euro to the debtor countries—“Lead or Leave.”
SCHMITZ: Are you serious in suggesting that Germany could “leave”? That would break up the eurozone, with unforeseeable consequences.
SOROS: I am serious. From a strictly economic standpoint, the biggest problems caused by Germany leaving the euro would actually be in Germany. If Germany left, the euro would depreciate sharply and the debtor countries would regain their competitiveness. On the other hand, the deutsche mark would go through the roof. This would indeed help the adjustment process of the other countries, but Germany would find out how painful it can be to have an overvalued currency. Its trade balance would turn negative, and there would be widespread unemployment. German banks would suffer severe exchange rate losses and require large injections of public funds. On the other hand, the German government might find it politically more acceptable to rescue German banks than Greece or Spain. And there would be other compensations—German pensioners could retire to Spain and live like kings, helping Spanish real estate to recover.
SCHMITZ: But wouldn’t leaving the euro be the end of the European Union?
SOROS: Not if it was done by common agreement that would preserve the common market. If Germany imposed trade barriers to protect itself from, for instance, cheap Italian imports, that would be the end of the European Union. But if dissolution took place within a single market, then Germany would have an adjustment problem but the EU and the euro could survive.
SCHMITZ: Merkel recently said in a speech: “I saw the GDR [German Democratic Republic] come down. I don’t want to see that again in Europe.”
SOROS: Yes, because she believes that the breakup of the currency would mean the breakup of the European Union.
SCHMITZ: You disagree?
SOROS: I do. In fact, you may have to break up the currency to preserve the EU. If Chancellor Merkel were really committed to preserving the European Union, the best way to do it would be by creating a proper banking union backed by pan-European guarantees and some kind of mutualized bond market. But if Chancellor Merkel is unwilling to make any further concessions to relieve the financial pressures created by the euro crisis, then the only remaining way to achieve the appropriate adjustment for the debtor countries would be by breaking up the currency. That would give the debtor countries a big one-time gain. You would actually turn the tables and make the debtor countries more competitive than Germany because the German mark would go through the roof.
SCHMITZ: But other countries like Belgium, Austria, the Netherlands, which used to be closely connected to the deutsche mark, would then leave the currency union, too.
SOROS: Yes, that is probably true, although it is not clear how well the Netherlands and Belgium would cope with their debt problems, which are as severe as the problems in some of the Mediterranean countries. Of course they could realign vis-à-vis the German mark before they formed a new currency block.
SCHMITZ: Still, the risk is that you would have a Northern Europe confronting a Southern Europe—an even more divided continent.
SOROS: Not at all. We would have two currency blocks within the European Union that could work better than a single currency. Both sides would have to cooperate to keep the exchange rates from diverging too much. That would actually be the fulfillment of Keynes’s ideal of a currency system in which both the creditors and the debtors would be obliged to make adjustments in order to maintain stability.
Germany leaving the euro would bring instant relief for the debtor countries. Suddenly they would be so competitive that Italian and Spanish exports would be flooding the German market and creating unemployment in Germany. But excessive overvaluation would send the northern block into an economic depression. That, in turn, would force Germany to apply the classic Keynesian anticyclical policies that it currently opposes: cutting taxes, increasing public spending, and applying monetary stimulus.
SCHMITZ: The big question is: Where would France end up?
SOROS: In my opinion, France would become the natural leader of the Latin Europe. A currency division between north and south would put Germany and France on opposite sides. France would naturally fit in as the leader of the south, and Germany, of course, would be the leader of the Northern European or Protestant euro. The alternative, with France joining Germany in a northern currency union, is almost inconceivable. France could not face competition with Spain and Italy after a southern devaluation. By contrast, as leader of the Latin block, France would reassert itself as a great power. Britain could also resume its historic role as the arbiter between two continental blocks.
SCHMITZ: Speaking of France: when one talks to leaders in Berlin, they paint France as “narcissist” and in denial about its difficult economic situation.
SOROS: They are right. Italy and Spain have actually addressed their structural problems, but France doesn’t pay any serious penalty for failing to reform. It enjoys practically the same status as Germany as far as the cost of capital is concerned, whereas Italy and Spain have to pay a few percent of their GDP every year to refinance their debts. That has allowed the French government to avoid doing anything difficult or unpopular.
SCHMITZ: Basically, France is not being punished, and that’s why the French are so hesitant to embrace reform.
SOROS: Now you are speaking like a German who admires the Spartan tradition. That reminds me of my father, who used to joke that Spartans are taught to suffer other people’s pain without flinching. Unfortunately, that fits the current situation too well. But you are right. France hasn’t really moved at all. And I don’t see that changing anytime soon.
SCHMITZ: What do you think of Angela Merkel’s leadership style?
SOROS: I think Merkel is an extremely skillful democratic politician who reads the mind of the electorate very well and represents the beliefs of the majority electorate very accurately. At the same time, she is pro-European in the sense that she is committed to preserving the euro. But there she is making a big mistake, because the euro is only a means to an end, which is a well-functioning European Union. As a result of the euro crisis, the means are now threatening to destroy the end. The euro, which was meant to be a stepping-stone on the path to a more complete political union, has already transformed the European Union from a voluntary association of equal states into a debtor-creditor relationship, which is neither voluntary nor equal.
Before the reunification of Germany, every country was in a minority; no nation or nationality was large or influential enough to dominate the European Union. But now Germany has emerged as the hegemon. That was not the result of an evil plot but the unintended consequence of a confluence of unexpected circumstances. As I have emphasized, Germany is a perpetrator that is the victim of its own ignorance. But with the passage of time, Germany may become hated and resisted as an exploiter, and the European Union may dissolve in acrimony.
SCHMITZ: That takes me back to your proposal that Germany should “lead or leave the euro.” Well-known German economist Hans-Werner Sinn said you are playing with fire because you know full well that Germany cannot simply leave the euro, nor can it introduce eurobonds over the objection of the German Constitutional Court.
SOROS: But by generating the necessary political will the laws can be changed.
SCHMITZ: So the idea of having two zones within the euro area is now more appealing to you than the idea of eurobonds that you pushed for earlier?
SOROS: Not at all. It would be far better for Germany to become a benevolent hegemon by agreeing to mutual guarantees in some form. The point I am making is that Germany must now choose: either become a benign leader, which means agreeing to a strong banking union and some form of eurobonds; or leave the euro and allow the debtor countries to mutualize their government bonds.
SCHMITZ: Eurobonds might equalize interest rates, but they are not going to do anything about competitiveness.
SOROS: Competitiveness is not the fundamental problem of the euro. Europe now has a large, probably excessive and unhealthy trade surplus with the rest of the world. Structural reforms like cutting government waste or removing restrictive practices will improve living standards in individual countries, but they will not correct the euro’s basic design flaws. You need to do both.
SCHMITZ: Don’t you think one of the problems of the euro was, or maybe still is, that it is overvalued?
SOROS: No, it’s more complicated. The eurozone has ceased to be an optimal currency block. For the debtor countries, the exchange rate is too high. For Germany, it’s too low. On balance, the euro is probably undervalued because of a lack of confidence in its durability.
SCHMITZ: So you think nowadays a depreciation of the euro is no way out for the weaker countries? Would such a step not instantly improve their competitiveness?
SOROS: Against the rest of the world, yes. Against Germany, no.
SCHMITZ: Which brings us back to the present approach of austerity and structural reform. Do you think the austerity policy that Germany is pitching can ever work?
SOROS: In the long run, yes. But as Keynes might have observed, in the long run it will kill the European Union.
SCHMITZ: What about the role of central banks, highlighted by the quantitative easing in Japan and the United States? The ECB is aspiring to a similar role as part of a solution to the euro crisis—but is the ECB becoming too powerful?
SOROS: The ECB’s power greatly depends on Germany’s support. At the height of the euro crisis, Chancellor Merkel had to turn to the ECB to save the euro. In the summer of 2012, the German government’s representative Jörg Asmussen sided with ECB president Mario Draghi against the president of the Bundesbank, Jens Weidmann. That enabled Draghi to assert that the ECB would do “whatever it takes.” But as soon as the financial pressures abated, Germany started whittling down the concessions it had made during the emergency. The ECB can try to act without the consent of the German government, but it won’t get very far.
SCHMITZ: You have been so active in Eastern Europe, what is the perspective there on the European idea? Polish foreign minister Radosław Sikorski gave a speech a year ago in Berlin and said, “I may be the first Polish foreign minister to say that, but I want more German leadership.”
SOROS: The euro crisis actually hit Eastern Europe even before it became known as the euro crisis. In 2009, when the European authorities provided a guarantee for the financial system, this guarantee seemed credible. But the Eastern European countries, which were not members of the eurozone, were not in a position to provide credible guarantees. Therefore, the Eastern European economies were hit very heavily early on. But now, as the flaws in the construction of the euro became apparent, it’s the debtor countries within the euro system that are suffering more, while Eastern Europe is relatively less affected. That is mainly because Eastern European economies are closely tied to Germany, and as a creditor country, Germany is doing substantially better than the debtor countries. Moreover, the Eastern European countries were never able to discount their government debts with the ECB. So they never had the benefit that the debtor countries in the eurozone are now losing—the dubious benefit of building up excessive debts at artificially low prices. Absolute debt levels in Eastern Europe are much lower, as befits countries that have had to borrow in foreign currencies.
SCHMITZ: If the Franco-German axis continues to weaken, as you are suggesting, could Poland be the new France?
SOROS: Poland has emerged as the soundest of the Eastern European countries in many ways. There is also a great determination in Eastern Europe not to become dominated by Russia and finally to fully participate in the eurozone. Poland’s partnership with Germany could eventually come to rival the Franco-German alliance.
SCHMITZ: You have often mentioned how important self-criticism is for you. According to your writings, you have constantly reassessed yourself and tried to learn from your mistakes. When you look at the political leaders in Europe right now, for example, do you see that trait at all?
SOROS: Sadly, no. Political leaders are hampered from admitting mistakes. In other words, it doesn’t get you any votes. I think Merkel has recognized, and in fact corrected, some of the mistakes she has made, but she doesn’t like to boast about that. They have to be covered up because the public doesn’t understand that making mistakes is human.
SCHMITZ: Is it possible that your analysis of the euro is all wrong?
SOROS: Of course that is possible. But I can’t help believing in what I say, although I realize I may be wrong. I believe in my own fallibility. I take fallibility as seriously as Descartes took reason with his “Cogito, ergo sum.” Fallibility plays the same role in human affairs as mutation does in biology. The misconceptions and misunderstandings that go into our decisions help shape the events in which we participate. [See Appendix.] Because we cannot base our decisions on perfect knowledge, we cannot avoid mistakes. There should be no shame or guilt attached to making mistakes, except when you persist even after you have realized that your policy is wrong.
SCHMITZ: Give us an example.
SOROS: Suppose that the German public reads my book and finds my arguments persuasive; the German government would then be guilty if it did not reverse course. Only Germany is in the position to change the rules and resolve the euro crisis. If a debtor country tried it, it would be punished both by the European authorities and by the financial markets. Like it or not, the plain fact is that only Germany can end the nightmare that afflicts the heavily indebted countries, and therefore it is incumbent on Germany to do something about it.