GREGOR PETER SCHMITZ: We talked a lot about the crisis of the European Union. With regard to the euro, though, isn’t the worst over?
GEORGE SOROS: If you mean that the euro is here to stay, you are right. That was confirmed by the German elections, where the subject was hardly discussed, and by the coalition negotiations, where it was relegated to Subcommittee 2A. Chancellor Merkel is satisfied with the way she handled the crisis and so is the German public. They reelected her with an increased majority. She has always done the absolute minimum necessary to preserve the euro. This has earned her the allegiance of both the pro-Europeans and those who count on her to protect German national interests. That is no mean feat.
So the euro is here to stay, and the arrangements that evolved in response to the crisis have become established as the new order governing the eurozone. This confirms my worst fears. It’s the nightmare I’ve been talking about, and there is little chance we’ll wake up soon. As I keep saying, Germany is the only country in a position to change the prevailing order. No debtor country can challenge it; any that might try would be immediately punished by the financial markets and the European authorities.
SCHMITZ: If you said that to Germans, they would say: Well, we have already evolved a lot. We are more generous now and have modified our policy of austerity.
SOROS: I acknowledge that Germany has stopped pushing the debtor countries under water. They are getting a little bit of oxygen now and are beginning to breathe. Some, particularly Italy, are still declining, but at a greatly diminished pace. This has given a lift to the financial markets because the economies are hitting bottom and that almost automatically brings about a rebound.
But the prospect of a long period of stagnation has not been removed. There is widespread agreement among all the financial institutions and experts, with the conspicuous exception of Germany, that the eurozone is threatened by deflation. The consensus includes the IMF, the US Treasury, and the ECB, excluding the Bundesbank and its allies. Opposition from the Bundesbank will prevent the ECB from successfully overcoming the deflationary pressures the way other central banks have done, notably the Federal Reserve. That’s why the eurozone is facing a long period of stagnation. And that prospect has set in motion a negative political dynamic. Anybody who finds the prevailing arrangements intolerable is pushed into an anti-European posture. So I expect the process of disintegration to gather momentum. During the acute phase of the euro crisis, we had one financial crisis after another. From now on I expect a series of political rather than financial crises, although the latter cannot be excluded.
SCHMITZ: You say that current arrangements are intolerable. What exactly needs to change? What needs to be reformed?
SOROS: At the height of the euro crisis, Germany agreed to a number of systemic reforms, the most important of which was a banking union. But as the financial pressures abated, Germany whittled down the concessions it had made. That led to the current arrangements, which confirm my worst fears.
SCHMITZ: As we speak, European finance ministers are concluding an agreement on the banking union. What do you think of it?
SOROS: In the process of negotiations, the so-called banking union has been transformed into something that is almost the exact opposite. Instead of creating a European banking system, it reestablishes national silos. This is dangerous.
SCHMITZ: What’s the danger?
SOROS: The incestuous relationship between national authorities and bank managements. France in particular is famous for its inspecteurs de finance, who end up running its major banks. Germany has its Landesbanken and Spain its caixas, which have unhealthy connections with provincial politicians. These relationships were a major source of weakness in the European banking system and played an important role in the banking crisis that is still weighing on the eurozone. The proposed banking union should have eliminated them, but they were largely preserved, mainly at German insistence.
SCHMITZ: That is a pretty drastic condemnation. How do you justify it?
SOROS: In effect, the banking union leaves the banking system without a lender of last resort. The proposed resolution authority is so complicated with so many decision-making entities involved that it is practically useless in an emergency. Even worse, the ECB is legally prohibited from undertaking actions for which it is not expressly authorized. That sets it apart from other central banks, which are expected to use their discretion in an emergency. But Germany was determined to limit the liabilities that it could incur through the ECB. As a result, member countries remain vulnerable to financial pressures from which other developed countries are exempt. That is what I meant when I said that overindebted members are in the position of Third World countries that are overindebted in a foreign currency. The banking union does not correct that defect. On the contrary, it perpetuates it.
SCHMITZ: You sound disappointed.
SOROS: I am. I left no stone unturned trying to prevent this outcome, but now that it has happened, I don’t want to keep knocking my head against the wall. I accept that Germany has succeeded in imposing a new order on Europe, although I consider it unacceptable. But I still believe in the European Union and the principles of the open society that originally inspired it, and I should like to recapture that spirit. I want to arrest the process of disintegration, not accelerate it. So I am no longer advocating that Germany should “lead or leave the euro.” The window of opportunity to bring about radical change in the rules governing the euro has closed. From now on, negotiations will merely be about changes at the margin. The rules governing the euro used to be the primary focus of my interest, but that is no longer true.
SCHMITZ: So, basically, you are giving up on Europe?
SOROS: No. I am giving up on changing the financial arrangements, the creditor-debtor relationship that has now turned into a permanent system. I will continue to focus on politics, because that is where I expect dramatic developments.
SCHMITZ: I see. Obviously, people are concerned about the rise of populist movements in Europe. Do you see any opportunity to push for more political integration, when the trend is toward disintegration?
SOROS: I believe in finding European solutions for the problems of Europe; national solutions make matters worse. So I am hoping for some kind of pro-European political alliance emerging. There is a growing alliance of anti-European forces, and they will become an important element within the European Parliament, where I expect a significant anti-European minority after the 2014 elections.
SCHMITZ: Some people say up to one-third, right?
SOROS: Yes. And I am particularly worried about the impact that the anti-European minority is going to have on the policies pursued by the so-called pro-European majority.
SCHMITZ: It seems the pro-Europeans are often silent on important issues because they are afraid that speaking up might increase support for the extremists—for example, in the case of the Lampedusa refugees.
SOROS: Like it or not, migration policy will be a central issue in the elections. We must find some alternative to xenophobia.
SCHMITZ: What do you propose to do about it?
SOROS: I have established an Open Society Initiative for Europe—OSIFE for short. One of its first initiatives is Solidarity Now, in Greece. The original idea was to generate European solidarity with the plight of the Greek population that is suffering from the euro crisis and Greek solidarity with the plight of the migrants, who experience inhuman conditions and are persecuted by the Golden Dawn. It took us some time to get the project off the ground, and by the time we did, it was too late to generate European solidarity with the Greeks because other heavily indebted countries were also in need of support. So we missed that boat, but our initiative has had the useful by-product of giving us a better insight into the migration problem.
SCHMITZ: What have you learned?
SOROS: That there is an unbridgeable conflict between North and South on the political asylum issue. The countries in the North, basically the creditors, have been generous in their treatment of asylum seekers. So all the asylum seekers want to go there, particularly to Germany. But that is more than they can absorb, so they have put in place a European agreement called Dublin III, which requires asylum seekers to register in the country where they first enter the EU. That tends to be the South, namely, Italy, Spain, and Greece. All three are heavily indebted and subject to fiscal austerity. They don’t have proper facilities for asylum seekers, and they have developed xenophobic, anti-immigrant, populist political movements.
Asylum seekers are caught in a trap. If they register in the country where they arrive, they can never ask for asylum in Germany. So, many prefer to remain illegal, hoping to make their way to Germany. They are condemned to illegality for an indefinite period. The miserable conditions in which they live feed into the anti-immigrant sentiment.
SCHMITZ: Isn’t it ironic that the nations suffering most from the euro crisis are also the ones worst hit by the migration problem?
SOROS: Indeed. The fact is that European migration policy is hopelessly outdated. It was established during the Cold War, when there was only a trickle of political refugees coming in from the repressive regimes of the Soviet empire. They were heroes of resistance and were genuinely welcomed. At the same time, countries such as Germany suffered from an acute shortage of workers.
But the world has changed, and there are now millions from all over the world who qualify as political refugees, and that exceeds the capacity of the European Union to absorb them. And today the heavily indebted countries of the South have an acute unemployment problem of their own.
Everybody is aware of the danger posed by xenophobic, anti-European parties that use the migration issue to get votes. Pro-Europeans like me find it more difficult to admit that our insistence on carrying out asylum policies to the letter of the law is just as biased and unrealistic as the uncompromising opposition of the anti-European forces. There is a crying need for a fundamental rethinking of both migration and asylum policy. The issue flared up after Lampedusa, but the European Commission postponed any meaningful discussion until after the 2014 European parliamentary elections to cover up the disagreement. This will yield the initiative to the anti-European forces. That is what I would like to prevent.
There are elements of a European migration policy that are already working. For instance, the EU is spending 2 billion on Syrian refugees outside European borders. Without that, Europe would already be flooded with Syrian refugees. Likewise, there is a very competent European emissary in the Horn of Africa, Alex Rondos, seeking to stem the flow of asylum seekers from Eritrea, but the public is not aware of it. We need a comprehensive strategy designed to relieve human suffering.
SCHMITZ: Looking at other European issues, aren’t your foundations also very involved in the problems of the Roma (Gypsies)?
SOROS: Yes, we have been engaged in those issues for more than twenty-five years. This is another problem that requires a European solution. All across Europe, the Roma face tremendous racism, discrimination, and hostile stereotypes. What is truly shocking is that their living conditions have actually deteriorated since they became EU citizens. At the same time, almost everywhere the majority population’s attitude has become more hostile.
To address this, my foundations have focused primarily on education, but also on culture. One of our most important programs is the Roma Education Fund, which we established with the World Bank in 2005. In order to break hostile stereotypes, Roma children must be educated to take pride in their Roma heritage. That is a key part of our approach. Otherwise, educated Roma could blend into the majority population because they do not fit the negative stereotype, but the stereotype would remain.
If the approach developed by the fund were generally adopted, it would go a long way toward breaking the stereotype. The educated Roma themselves would become the most effective advocates in the struggle for equal treatment. That is already happening. We have managed to educate a small cohort of young Roma who retain their Roma identity. They are motivated, enthusiastic, and they are making a real difference. But there are too few of them and the Roma population is growing faster than the Roma Education Fund. The program ought to be scaled up by governments, with the help of the EU, and made available to all the Roma children in Europe.
This is another instance where the European Commission is playing a positive role. Structural funds help pay the additional costs involved in integrating the Roma. In the area of employment, which is of course also crucial, experts from the commission and my foundations are developing a demonstration project to make private-sector internships available to Roma youth enrolled in vocational schools. We are now working with the commission and the Council of Europe on the missing piece to a lasting solution of the Roma problem: a European Roma Institute devoted to restoring Roma language, history, and culture.
SCHMITZ: What other European problems preoccupy you?
SOROS: British membership in the European Union. There is a real danger that Britain may be forced out or decide to leave. That would be a big step forward in the disintegration of the European Union.
SCHMITZ: Some people may say it wouldn’t be a big loss. The British were opposed to the idea of a united Europe from the beginning. Why do you think it would be a big step toward disintegration?
SOROS: Because Britain has always played a balancing role between hostile blocks on the continent. And Britain’s absence would greatly diminish the weight of the EU in the world. That would be a loss for the world. In my view, the world is suffering from a breakdown in global governance. There are many unresolved political crises that are causing many casualties and immense human suffering. That can be attributed to both Europe and America being preoccupied with internal problems and not pulling their weight in the world. I consider that one of the most harmful side effects of the euro crisis. The world badly needs Europe’s soft power.
SCHMITZ: You said Britain might be forced out. Don’t you think the British are kind of blackmailing the rest of Europe?
SOROS: Certainly. They have already gotten a lot of exemptions, and David Cameron, who I don’t think wants to leave—
SCHMITZ: Because it would be bad for Britain, too.
SOROS: I think it would be a big blow to Britain, because right now, Britain has the best of all possible worlds. It is part of the common market, but it is not part of the euro. Any change would be for the worse as far as Britain is concerned. But the anti-European forces, which I think are still a minority, are very active. The UK Independence Party has only 7 percent of the votes, but only 22 percent voted in the European parliamentary elections last time. If the same happens again, UKIP could capture one-third of the seats. And that would greatly reinforce the euro-skeptic wing of the Conservative Party.
Fortunately the Liberal Democrats, whose very survival as a national party is at stake, have decided on a strong pro-European campaign. There are now 2.7 million EU nationals living in Britain, the majority of whom would clearly want Britain to stay in Europe. That is something the OSIFE could do something about. We could mobilize the East Europeans living in Britain to vote in Britain. Many of them would choose the Liberal Democrats. That would make them a potent counterforce to UKIP and encourage both the Conservative and the Labour Parties to take a more pro-European position in the subsequent national elections.
SCHMITZ: We have discussed Britain. What about the other major European countries?
SOROS: Italy is the one I have been following most closely. The internal political problems there are more serious than generally recognized. The Italians used to be very pro-European. They looked to the European authorities to impose some discipline on their own politicians. When Mario Monti became prime minister, they rallied around him and he was able to assemble a really reform-minded government of technocrats. After a promising start, he failed to obtain any rewards from Chancellor Merkel and he lost momentum. It has been downhill ever since. The majority of Italians turned anti-European, and now that Berlusconi has finally been eliminated, Beppe Grillo, in spite of all his shortcomings, has the field all to himself.
The recent decision of the Italian Constitutional Court declaring the current electoral system unconstitutional will have far-reaching consequences. Effectively, it is the end of the second Italian republic. It is unlikely that the current parties will be able to agree on a new electoral law. That may extend the life expectancy of the Letta government, which is good news for the near term, but it means that the next elections will probably be conducted on the basis of the old electoral law and that is unlikely to produce a workable coalition. That is one of the future political crises one can anticipate.
SCHMITZ: Oh, that’s very interesting. When we speak of political crises in countries, do you think in France, is it more of a political problem than a fiscal or economic one? Because they seem to be in denial.
SOROS: It’s a combination of both. France is the sick man of Europe. It has been exempted from penal risk premiums on account of its close association with Germany; nevertheless, its economic performance is inferior to that of Italy and Spain. It’s a very depressing atmosphere in Paris. There is a mood of despondency. That will benefit Marine Le Pen, who is a more skillful politician than her father and is now expected to win the largest number of votes in the European parliamentary elections.
SCHMITZ: There is a new book out by Helmut Schmidt, the former German chancellor, and he accused Merkel of neglecting the relationship with Paris. He was saying: When I was in government, I had the relationship with Giscard d’Estaing. Later, it was Kohl and Mitterrand, and now she would have to make more of an effort to reach out to François Hollande and do something together with the French. Do you agree?
SOROS: Well, I think that has already happened. At first Hollande tried to distance himself from Merkel, but he has come to realize that he cannot afford to do so. He became an obedient junior partner—more junior than his predecessors. That has contributed to the mood of despondency in Paris.
SCHMITZ: It is interesting that you have a paralyzed government at home, but in foreign policy, Hollande is pretty active, right? That’s a contradiction in a way.
SOROS: Not really. Actually, it’s complementary, because foreign policy is the only place where Hollande can actually do something that appeals to the public.
SCHMITZ: Right, right. You said in the second interview that Poland could emerge as a junior partner of Germany.
SOROS: I can repeat what I said then, namely, that the new Europe as exemplified by Poland is much healthier both politically and economically than the old Europe. Hungary is an exception.
SCHMITZ: In the past week or so, we all saw the pictures from Ukraine, where people are very pro-European and want to join the European Union. That is in striking contrast to people in Greece, Italy, and France, who seem to be fed up with it.
SOROS: Well, that shows how important it would be for Europe to revive and to recapture the original idea of the European Union. Ukraine is a powerful reminder. You might call it a wake-up call.
SCHMITZ: What do you think of the current policy of the European Union in that region? Do you think they made mistakes by not offering more to these countries?
SOROS: The neighborhood policy is the prime victim of the Euro crisis. The EU has very little to offer because of its internal political and financial problems.
SCHMITZ: So Vladimir Putin had 20 billion to offer and the EU a few million?
SOROS: Well, that was in response to a pretty blatant attempt at extortion by President Yanukovych. That has backfired, but the spontaneous reaction of the Ukrainian people shows the attraction that Europe still has for the neighboring countries.
SCHMITZ: What do you think is going to happen in Ukraine?
SOROS: I don’t like to make short-term predictions because they can easily prove to be wrong. I prefer to pontificate about long-term trends because, as Keynes said, in the long term we are all dead. But I will take a chance.
We have just witnessed a dramatic test of strength between Russia and the European Union. Russia came out ahead. That should be a wake-up call for Europe. At the same time the spontaneous uprising of the Ukrainian people showed Putin the limits of his power. In that contest, the Ukrainian people came out ahead. The net result is a stalemate and a continuation of the status quo in Ukraine. A corrupt, inept, and unpopular government is pitted against civil society, and neither side is able to impose its will on the other. Ukraine remains precariously balanced between Russia and Europe. Russia has gained the upper hand for the next two years at the cost of 20 billion and a significant concession on the price of natural gas. These funds will be wasted on keeping Yanukovych in power without any prospect for structural reforms that could make Ukraine economically viable. At the same time, Putin has to realize that his dream of reconstituting what is left of the Soviet Union through a customs union is unattainable. And civil society will have to struggle to preserve what it can of the freedoms temporarily regained by the uprising. The outlook beyond 2015 remains wide open.
SCHMITZ: Tell us a little more about the situation in Ukraine, because you know the country better than probably anyone else.
SOROS: Unfortunately, I am very out of touch. I used to know the Ukraine intimately. I set up a foundation even before Ukraine became independent, and it became an integral part of civil society. Putin accused me of being the instigator of the “color revolutions,” but that was a false charge. Civil society was responsible for the color revolution, just as it is for the recent uprising. Still, this is the first time I have become totally out of touch. All my information has been coming from the foundation after a time lag. They told me a couple of interesting things. One is that the opposition to Yanukovych came not only from western Ukraine but also from the Russian-speaking East. A deeply divided country was unusually united. The other is that before going into recess, the Duma passed a law giving amnesty to the participants in the uprising. Now, it would be important to end the uprising on that positive note so as to preserve the capacity of civil society to protect itself.
SCHMITZ: What do you think the Europeans could have done differently?
SOROS: Of course, visa-free travel was a very important issue, and I think getting hung up on the Yulia Tymoshenko case was a mistake, because the EU was asking for too much and offering too little, practically nothing compared to Russia.
SCHMITZ: Do you think it would have been a good idea to offer membership to Ukraine early on?
SOROS: Ukraine is obviously very far from being qualified, and unfortunately, the European Union has lost the ability to offer membership because it is itself in a process of disintegration. This has greatly reduced its influence in the world. The same thing has happened in the case of Turkey.
SCHMITZ: What do you think of Putin’s policy?
SOROS: Now you are coming to the crux of the matter. Russia is emerging as a big geopolitical player, and the European Union needs to realize that it has a resurgent rival on its east. Russia badly needs Europe as a partner, but Putin is positioning it as a rival. There are significant political forces within the Russian regime that are critical of Putin’s policy on that score.
SCHMITZ: Can you be more specific?
SOROS: The important thing to remember is that Putin is leading from a position of weakness. He was quite popular in Russia because he restored some order out of the chaos. The new order is not all that different from the old one, but the fact that it is open to the outside world is a definite improvement, an important element in its stability. But then the prearranged switch with Dmitry Medvedev from prime minister to president deeply upset the people. The regime felt existentially threatened by the protest movement. Putin became repressive at home and aggressive abroad. That is when Russia started shipping armaments to the Assad regime in Syria on a massive scale and helped turn the trend against the rebels. The gamble paid off because of the preoccupation of the Western powers—the United States and the EU—with their internal problems. Barack Obama wanted to retaliate against the use of chemical weapons, but the British Parliament voted against participating. Obama got cold feet and, Hamlet-like, left the decision to Congress. He was about to be rebuffed when Putin came to the rescue and persuaded Assad to voluntarily surrender his chemical weapons. That was a resounding diplomatic victory for him. He then prevailed against the European Union in Ukraine. Yet the spontaneous uprising of the Ukrainian people must have taught Putin that his dream of reconstituting what is left of the Soviet Union is unattainable. He is now facing a choice between persevering or changing course and becoming more cooperative abroad and less repressive at home.
SCHMITZ: Do you see any shift in German policy toward Russia? We had a very strong relationship with Putin under Gerhard Schröder. Merkel has been far more confrontational. For example, she spoke out rather strongly against Putin in Vilnius.
SOROS: Well, having grown up in East Germany, she should have an inside understanding of Russia. The rapprochement with Poland has also created a less pro-Russian attitude in Germany. At the same time, Germany continues to make special deals with Russia. Russia has benefited from the fact that Europe is disunited. But now that Russia is emerging as a threat to Europe, it may once again become a force that brings Europe closer together. I pin my hopes on Chancellor Merkel.
SCHMITZ: How can you reconcile that with all your criticism of the Chancellor?
SOROS: I can’t. But one must never give up hope. I have learned from experience that people can change when you least expect it. Think of the Burmese dictator Than Shwe, who gave up power after twenty years, just when things were going from bad to worse in Burma.
SCHMITZ: Could Ukraine be a wake-up call for Angela Merkel?
SOROS: Absolutely. I just read a report in Le Monde about a dinner at the European Council, which shows that she was definitely affected by it.
SCHMITZ: Is Russia a credible threat to Europe if its economy is as weak as you say?
SOROS: The oligarchs who control the Russian economy don’t have any confidence in the regime. They send their children and money abroad. That is what makes the economy so weak. Even with oil over $100, which is the minimum Russia needs to balance its budget, it is not growing. Putin turned aggressive out of weakness. He is acting in self-defense. He has no scruples, he can be ruthless, but he is a judo expert, not a sadist—so the economic weakness and the aggressive behavior are entirely self-consistent.
SCHMITZ: How should Europe respond to it?
SOROS: It needs to be more united. Putin prides himself on being a geopolitical realist. He respects strength and is emboldened by weakness. Yet there is no need to be adversarial. The European Union and Russia are in many ways complementary; they both need each other. There is plenty of room for Russia to play a constructive role in the world, exactly because both Europe and the United States are so preoccupied with their internal problems.
SCHMITZ: How does that translate into practice, particularly in the Middle East?
SOROS: It has totally transformed the geopolitical situation. I have some specific ideas on this subject, but it is very complicated. I can’t possibly explain it in full because there are too many countries involved and they are all interconnected.
SCHMITZ: Give it a try.
SOROS: I should start with a general observation. There are a growing number of unresolved political crises in the world. That is a symptom of a breakdown in global governance. We have a very rudimentary system in place. Basically, there is only one international institution of hard power: the UN Security Council. If the five permanent members agree, they can impose their will on any part of the world. But there are many sovereign states with armies; and there are failed states that are unable to protect their monopoly over the use of lethal force or hard power.
The Cold War was a stable system. The two superpowers were stalemated by the threat of mutually assured destruction, and they tried to restrain their satellites. So wars were fought mainly at the edges. After the collapse of the Soviet Union, there was a brief moment when the United States emerged as the undisputed leader of the world. But it abused its power. Under the influence of the neocons, who argued that the United States should use its power to impose its will on the world, President George W. Bush declared war on terror in response to 9/11 and invaded Iraq on false pretenses. That was a tragic misinterpretation of the proper role of hegemonic or imperial power. It is the power of attraction—soft power—that ensures the stability of empires. Hard power may be needed for conquest and self-protection, but the hegemon must look after the interests of those who depend on it in order to secure their allegiance instead of promoting only its own interests. The United States did that very well after World War II, when it established the United Nations and embarked on the Marshall Plan. But the neocons forgot that lesson. President Bush destroyed American supremacy in no time. The neocons’ dream of a “new American century” lasted less than ten years. So did Hitler’s 1,000-year Reich.
SCHMITZ: What’s the connection?
SOROS: They each had a false idea, which they tried to impose by force—President Obama then brought American policy back to reality. His record in foreign policy is better than generally recognized. He accepted the tremendous loss of power and influence and tried to “lead from behind.” In any case, he is more preoccupied with domestic than foreign policy. In that respect America is in the same position as Europe, although for different reasons. People are inward-looking and tired of war.
The world is now full of hegemonic powers that are unwilling to accept the responsibilities and liabilities that go with soft power. China is also a reluctant hegemon, and says: We are a developing country preoccupied with our own problems—we cannot afford to look after the problems of the world. At the same time, the Chinese harbor imperial ambitions. And there are many other developing countries that are aspiring to imperial power. A tension between soft and hard power seems to be characteristic of all actual or potential hegemons. This is the general background against which the Arab Spring is unfolding.
The Arab Spring has many similarities with the revolution that swept away the Soviet Union, but there are some major differences. The people of the Soviet empire were attracted to the West. Most of the Arab revolutionaries are mistrustful of the West and are fired by Islamic religious fervor. To complicate matters, there is a growing split between Shia and Sunni, and an effort by the Sunni monarchies to exterminate the Muslim Brotherhood.
As we have seen, the Western powers have turned inward. This has created a power vacuum, which has allowed conflicts to fester unresolved all over the world. Recently, Russia has moved into this power vacuum, trying to reassert itself as a geopolitical player. That was a bold maneuver, inspired by Putin’s internal weakness, and it is paying off because of the weakness of the West. That is radically changing the geopolitical landscape. Suddenly, the prospect of a solution has emerged for the three major unresolved conflicts in the Middle East—Palestine, Iran, and Syria—when one would have least expected it. Russia can do what the Western powers couldn’t because of the implacable opposition of Russia: achieve a political settlement in Syria.
The Syrian crisis is by far the worst, especially in humanitarian terms. Russia’s entry as a major supplier of arms, coupled with Hezbollah’s entry as a supplier of troops, has turned the tables in favor of Assad. The fighting can be brought to an end only by a political settlement imposed and guaranteed by the international community. Without it, the two sides will continue to fight indefinitely with the help of their outside supporters. Putin could force the Assad side to “voluntarily” surrender its chemical weapons. The rebel forces are less easily controlled by their outside supporters, and Putin may find it advantageous to let the fighting drag on, thereby keeping the price of oil high—his budget would fall into deficit with oil below $100. This raises the specter of a humanitarian catastrophe. Assad has followed a deliberate policy of denying food and destroying the medical system as a way of subduing the civilian population. Unless humanitarian assistance can be delivered across battle lines, more people will die from illness and starvation during the winter than from actual fighting.
SCHMITZ: What is the solution?
SOROS: International public opinion is surprisingly complacent. It responds to natural disasters but tends to shy away from man-made ones. My foundations and I are actively involved in trying to raise public consciousness of the impending humanitarian catastrophe. The public can exercise pressure on governments to live up to their responsibility to impose a political settlement and ensure the delivery of humanitarian aid across battle lines during the negotiations. It can also provide material support to those who are already actively delivering aid across battle lines.
SCHMITZ: What about Iran?
SOROS: There has been an actual breakthrough in the Iranian crisis in the form of a temporary agreement on nuclear weapons. The smart sanctions imposed by the Western powers have been very effective. The Iranian revolution itself advanced to the point where it fell into the hands of a narrow clique, the Revolutionary Guard; the mullahs have been pushed out of power. As head of the mullahs, the ayatollah cannot be pleased. He must also be aware that the large majority of the population is profoundly dissatisfied with the regime. In contrast with previous attempts at negotiations, he seems to be in favor of reaching an accommodation with the United States. That favors the prospects for a final agreement.
SCHMITZ: That leaves the longest-lasting crisis, Palestine.
SOROS: Recent developments in Egypt have improved the chances of progress in the long-festering Palestinian crisis. The army, with the active support of Saudi Arabia and the Gulf states, has removed the legally elected president and is engaged in the brutal suppression of the Muslim League. This otherwise disturbing development has a potentially benign side effect: it raises the possibility of a peace settlement between the Palestinian authority and Israel, to the exclusion of Hamas. This would have been inconceivable a few months ago. Secretary of State John Kerry became engaged in the Palestinian negotiations well before this window of opportunity opened, so he is ahead of the game. Prime Minister Benjamin Netanyahu is very suspicious but cannot openly oppose negotiations because, having campaigned against Obama in the American elections, he holds a weak hand. Negotiations are making progress, but very slowly indeed.
If all three crises were resolved, a new order would emerge in the Middle East. There is a long way to go because the potential losers in one conflict may act as spoilers in another. Netanyahu, for instance, is dead set against a deal with Iran. Nevertheless, the broad outlines of a potential new order can already be discerned. Russia could become more influential, relations between Saudi Arabia and the United States may become strained, and Iran may emerge as America’s closest ally, second only to Israel. But the situation remains fluid and may change from one day to the next.
SCHMITZ: We haven’t discussed China.
SOROS: That’s another long story. China is facing a tremendous problem. It has to change its growth model, which has been exhausted. It’s not something that has to happen immediately, but it’s already too late to have a smooth transition, because—let me explain.
The growth has been driven by exports and investments. China maintained an artificially low exchange rate that created an export surplus that the central government could use for its own purposes. That was a brilliant way of imposing taxation without representation and without the people actually noticing it. The fruits of their labor were collected by the central government through the artificial exchange rate. The proceeds were then used by the central government for investment. By not consuming but investing, the economy could grow at a very rapid rate. The growth rate effectively exceeded 10 percent a year. This occurred at a time when the Japanese economy, which had gone through a similar period of rapid growth previously, was undergoing a very painful correction and wasn’t growing at all. So during this period China doubled every seven years and Japan remained stagnant. China outstripped Japan and became the second-largest economy of the world, and if it were to continue at that rate, it would outstrip the United States in a few more years.
But that won’t happen. The household sector that was supporting this growth has shrunk, while the investments and exports have kept growing as a percentage of the total economy. Consumption takes up 70 percent of the GDP in the United States. In China, it’s now down to 34 percent; investments and exports take up the rest. It was really the forced savings of the household sector, the ordinary people, through the artificially low exchange rate and negative real interest rates for savings, that was the motor of growth.
But the productivity increases produced by these very large investments were gradually shrinking and eventually the marginal return on investments turned negative. Profit margins on exports became razor thin. This created a situation where the growth could no longer be subsidized by savings and had to be supported by borrowing. That was a nonlinear process, which went parabolic in the last few years. According to some estimates, one unit of growth now requires seven units of debt, and total social debt has reached 250 percent of GDP. In other words, China experienced a boom or bubble that eerily resembled the conditions that preceded the financial crisis of 2007–2008 in the United States. Indeed, the bubble was more pervasive, because in the United States it was confined to the housing sector, whereas in China it involved the entire economy.
SCHMITZ: I remember you said in the third interview that it is very unusual that you have two crises in one single decade. Normally, a generation goes by until we see a similar crisis.
SOROS: Yes. People who lived through that experience recognized the resemblance and warned against an impending financial crisis in China. The financial authorities in Beijing actually took notice of this warning and decided to forestall the financial crisis by restricting credit growth. That is when the private sector developed ways to sidestep the official limits, and a shadow banking industry grew up at a remarkably fast pace. State-owned banks and others set up off balance-sheet subsidiaries called wealth management companies, and they engaged in unsound practices that were nevertheless accepted by the public, because there was an implicit guarantee by the state, similar to Fannie Mae and Freddie Mac in America.
But there is a fundamental difference. Both China and America have a political system and a market system. But in America, the market dominates the politics, whereas in China, the state and party system controls the market. China has allowed a market system to develop, but the state still retained partial ownership and total control of the economy.
SCHMITZ: Do you see that changing at all?
SOROS: Well, no, because the party wants to remain in power, although ownership is being gradually transferred from the state to party members. The People’s Bank of China started restricting official credit in 2011. This led to the explosive growth of shadow banking in 2012–2013. In July 2013, a sudden jump in short-term interest rates to double digits threatened to push the real economy into a recession, and the party leadership pushed the panic button. It ordered the steel industry to restart the furnaces, and the PBOC to relax credit. The economy turned on a dime, and by November, when the Party Congress took place, it was already accelerating. The president then announced a series of far-reaching economic reforms, including a free trade zone for financial markets in Shanghai. There were political reforms as well, notably, forced labor was abolished and the residential permit (houkou) system was modified. President Xi Jinping took personal charge of economic reforms and the security services.
SCHMITZ: Do you think that is a sustainable model?
SOROS: No, it’s not. When the leaders ordered the restarting of the furnaces, they also restarted the credit growth at an accelerating rate. That’s unsustainable.
SCHMITZ: How long can it be sustained?
SOROS: That’s the big unknown. We are in uncharted territory. The authorities were right in deciding that they can only introduce these structural reforms when the economy as a whole is growing, as opposed to the European authorities that insisted on structural reforms in the midst of austerity. But nobody knows how much debt a state-controlled economy can accumulate before it collapses, and nobody knows what form the collapse will take. Because the party is determined not to lose power, I suspect that it will abandon market reforms before it abandons growth, because a recession would cause social unrest. But rising inequality and the endemic corruption could also result in social unrest. So success is far from assured. How the internal contradictions are going to be resolved is one of the most important questions confronting the world today. That is why I have switched my focus from the euro to China.
SCHMITZ: What does that mean for Europe?
SOROS: Very little for the next couple of years. It’s a longer-term problem.
SCHMITZ: There was a summit between the EU and China a few weeks ago, and it seemed like the Chinese were still very interested in Europe.
SOROS: Certainly, China wants to preserve Europe as a market for their exports and the euro as an alternative reserve currency. As you know, China intervened in the euro at $1.20 to the dollar, and that was the low point of the euro since then. In that respect, the attitude of China hasn’t changed, but its capacity to invest in Europe may be impaired. The Chinese have accumulated something like $3 trillion of reserves, but they will need them at home to take over the bad debts accumulated in the hands of the local authorities and to recapitalize the banks that are now loaded with bad debt. They are also more interested in investing in sources of raw material, like iron ore. That will take priority over investing in Europe.
SCHMITZ: Would you say that they are still committed to propping up the euro, as they did in the last crisis?
SOROS: I doubt it. The euro has a tendency to appreciate, but it is not coming from China. It may come from other Asian countries like Japan, which is creating a lot of yen through quantitative easing. That is a negative for Germany, which is directly competitive with Japan in 75 percent of its exports.
SCHMITZ: Do you think that the Obama administration is right in pivoting from Europe to Asia?
SOROS: Well, Europe is just now entering a long period of stagnation that Japan is determined to break out of.
SCHMITZ: So you are basically saying that it is something that the Europeans have to come to terms with, that they are not as important to the Americans as they were in the past?
SOROS: That is the reality.
SCHMITZ: What do you think of the American economy?
SOROS: I’m as optimistic as the rest of the world. Where I am more optimistic is on the political outlook. I think the Tea Party has carried its opposition to Obama to an extreme that the American public will not support. The conservative establishment of the Republican Party will have to break with the Tea Party. This augurs well for a return to the two-party system where both parties try to capture the middle ground.
SCHMITZ: This brings us to the trans-Atlantic relationship. That relationship has been poisoned by the National Security Agency revelations. Do you understand the anger in Europe?
SOROS: I sympathize with it. The extent of the surveillance was a shock for the European public, and I think it’s also a shock for Americans.
SCHMITZ: Are you disappointed that President Barack Obama is continuing these programs?
SOROS: He thinks that as a Democrat he cannot look weak on security, but he is making a mistake. Edward Snowden was a whistle-blower who exposed an excessive use of state power. I disagree with Snowden on that point. I believe that security should trump privacy. So I was ill-disposed toward Snowden at first when he flew to Hong Kong and then to Moscow. But I was shocked by the extent of the undisclosed surveillance, and Snowden gave a very credible defense that he did not allow any secrets to fall into the hands of the Chinese or the Russians.
SCHMITZ: Many compare him to Daniel Ellsberg, who leaked the Pentagon Papers about Vietnam. Ellsberg stayed in the United States, though, and faced the consequences.
SOROS: Those were different times. Ellsberg was not afraid of being prosecuted, but I think Snowden had reason to fear that he would be. Look at the way the Obama administration treated WikiLeaks informant Bradley Manning, who was first held in solitary confinement and eventually condemned to life in prison.
SCHMITZ: Would you call Snowden a hero?
SOROS: I respect him, and I would love to have him as an adviser of the US government in how to correct the excesses of the military. Actually, I would be happy to have him work for my foundation as an adviser so that we could be more effective in our critique of the Obama administration’s surveillance policies.
SCHMITZ: You have developed theories on the financial market and on philosophy for a long time, but you were not really taken seriously by economists and by philosophers. You even referred to yourself as a “failed philosopher.” But ever since the outbreak of the global financial crisis, which you largely predicted, your theories are in vogue. Do you feel validated?
SOROS: Frankly, I do. For a long time, I did not have much self-confidence when it came to my conceptual framework. I often thought it was nothing but a personal obsession of mine, not necessarily of interest to other people. But that changed after the crash of 2008. For instance Mervyn King, governor of the Bank of England, admitted that there was more to my ideas than he had believed. I found that rather satisfying. Needless to say, he went up in my estimation.
SCHMITZ: When I discussed this book project with friends, many asked why you are devoting a lot of time to a book on the arcane and complicated details of the euro crisis, even though you could be just enjoying your retirement. You are eighty-three and a newlywed.
SOROS: I try to live life as fully as possible, and having a good time is not my idea of having a good time. You might call me a history junkie because I really do want to influence history. I have always harbored an exaggerated view of my self-importance. I wanted to be an economic reformer, like Keynes, or even better, a scientist like Einstein.
SCHMITZ: Comparing yourself to these figures is a tall order. In comparison, are you happy with your achievements?
SOROS: The truth is that my reputation is based not on my philosophical or philanthropic achievements but on my success in making money. I am aware of that. But I like my persona. It is my creation and I am proud of it. That is a big change from the way I used to feel during the most productive period of my business career. For some reason, I used to be ashamed of myself, and I have simply grown out of that. I also used to be very isolated, and now I am very involved. So when all is said and done, being a public person has made me a happier private person.