Billionaire George Soros argues that the European sovereign debt crisis has transformed the European Union from a voluntary association of equal states to a creditor-debtor relationship. The creditors are the northern nations, such as Germany, and the debtors are the overleveraged nations such as Greece and Italy. In the current state, the debtors have to impose austerity measures on their countries to pay for their debts. Unemployment rate for youth in Spain and Greece is reaching 60 percent. Portugal needs a new rescue program and Slovenia could be asking for a new package as well. The austerity measures imposed by the European Central Bank as conditions for rescue programs are aggravating unemployment and further slowing economic growth in southern European states – in turn widening the gap between creditors and debtors.

George Soros

George Soros Argues: Issuing Eurobonds Could End European Debt Crisis

George Soros argues that issuing Eurobonds could end the European debt crisis by mutualizing the debts of euro area member states. Such states have become indebted in a currency they cannot control, the euro, and financial markets have penalized heavily indebted Euro Zone members by pricing their bonds as issues overextended in a foreign currency. Having Eurobonds will level the playing field as the danger of default and high premiums will be mitigated. Bank balance sheets will receive a boost and countries like Italy will save in debt payments. If a member state wants to issue additional debt, it will have to do so in its own name. George Soros points out that Eurobonds will not eliminate competitiveness gaps between countries and that member states will still need to undergo structural reform. In addition, the European Union banking union will need to make credit available to each country in equal terms. George Soros further postulates that if Germany opposes Eurobonds, it should leave the euro and allow the remaining countries to issue Eurobonds. Such bonds will compare favorable to U.S., U.K. and Japanese bonds as a depreciation of the euro will allow the debt burden to become bearable and bolster economic growth. Germany could suffer if its leaves the euro under the Eurobond issue scenario as it currency will likely appreciate making it less competitive.

Hans-Werner Sinn argues that Germany shall neither accept Eurobonds nor exit the euro. Indebted states shall be willing to undergo continuing austerity measures within the tight budget constraints of the Euro Zone to pay their obligations. If a country is bankrupt, it should inform its creditors that it cannot pay its debt. Sinn states that the root cause of the sovereign debt crisis is the loss of competitiveness from peripheral indebted states. Such nations financed wage increases that were not backed up by productivity gains. Sinn thinks that the solution to the European debt crisis lies with the indebted nations reducing their goods’ prices while having the creditor nations like Germany accept inflation. According to a study by Goldman Sachs Group, Inc. (NYSE:GS), countries like Greece, Portugal, and Spain will have to become 20-30% cheaper, and German prices will have to rise by 20% relative to the Euro Zone average.  The price cut will trigger a real devaluation of indebted countries enabling them to regain competitiveness by increasing demand for their goods.