George Soros on Wednesday had hard words to say on the financial crisis brewing in the European Union. Speaking on the sidelines of the World Economic Forum at Davos, Soros was utterly critical of the confused policy response of the European authorities to the financial crisis that struck in 2007. Soros however was hopeful that all was not lost, and that the euro and the EU could still be saved. He wanted the single currency block to change the way it is structured, and then follow it up with an economic stimulus. He rejected the view that structural austerity will lead to the reduction of countries’ ability to service their debts.
Soros wanted the authorities to emulate a plan pioneered by the late Italian central banker Tommaso Padoa-Schioppa, under which the European Financial Stability Facility will buy short-term treasury bills at low interest rates from countries with high debt burdens. By doing so, troubled countries likeItalyandSpainwould be able to refinance their debts by issuing treasury bills at rates of about 1%.
Soros had scathing comments to make of the European Central Bank’s long-term refinancing operation (LTRO) in December, which led to the expansion of its balance sheet by €489 billion. He argued that the move hadn’t cured the financial disadvantage of highly indebted member states, and had only temporarily relieved the liquidity problems of European banks and given a boost to the financial markets. Soros stressed the need for the ECB to be proactive against deflationary risks as well as inflationary ones, and warned thatGermanyin particular was unidimensional in its approach and was focusing only on the risks from inflation. He was critical of the way in which, instead of the IMF,Germanywas acting as the “taskmaster” and imposing tough fiscal discipline on the distressed European countries. Soros was also very gloomy on Greece, where a default looked more likely because of the inability of the government there to agree on a deal for debt restructuring, with its private creditors.