“The European Central Bank relieved an incipient credit crunch through its longer-term refinancing operations. The resulting rally in financial markets hid an underlying deterioration; but that is unlikely to last much longer,” he adds.
What’s the thrust of his argument? Simply put, that the EU crisis is a political issue that shouldn't be decided by the Bundesbank (Germany's federal bank) but by European authorities.
“The fundamental problems have not been resolved; indeed, the gap between creditor and debtor countries continues to widen,” Soros writes. “The crisis has entered what may be a less volatile but more lethal phase.”
He goes on to point out that when the crisis first began, “the eurozone’s break-up was inconceivable" because all of the countries’ finances were tied together at that point.
However, because of long-term refinancing operations and the fact that most of the EU countries stay away from international bonds, the billionaire philanthropist believes that within "a few more years, a eurozone break-up would become possible without a meltdown – but would leave creditor countries’ central banks holding big claims that would be hard to enforce against debtor countries’ central banks."
Well, okay, now that he’s located the problem, does he propose any solutions?
“First, the rules governing the eurozone have failed and need radical revision. Defending a status quo that is unworkable only makes matters worse,” Soros writes.
“Second, the current situation is highly anomalous, and exceptional measures are needed to restore normality. Finally, new rules must allow for financial markets’ inherent instability,” he adds.
To be realistic, the fiscal compact must be the starting point, although some obvious defects will need to be modified. Should a country violate the fiscal compact, it would be obliged to pay interest on all or part of the debt owned by the SPV. That would surely impose tough fiscal discipline.
By rewarding good behaviour, the fiscal compact would no longer constitute a deflationary debt trap. The outlook would radically improve. In addition, to narrow the competitiveness gap, all members should be able to refinance existing debt at the same interest rate. But that would require greater fiscal integration. It would have to be phased in gradually.
Soros concludes the article by reiterating that the fate of the EU shouldn't be decided by the Bundesbank but by a collective of European authorities.