The euro crisis is not only a currency crisis but also a political crisis, writes George Soros in the below commentary, arguing that member states' policies often reflect their views rather than their true interests.
The following contribution is authored by financier, speculator and businessman George Soros, chairman of Soros Fund Management.
"The so-called euro crisis is generally seen exclusively as a currency crisis, but it is also a sovereign-debt crisis – and even more [so] a banking crisis. The situation's complexity has bred confusion, and that confusion has political consequences.
Indeed, Europe faces not only an economic and financial crisis, but also, as a result, a political crisis. The various member states have forged widely different policies, which reflect their views rather than their true national interests – a clash of perceptions that carries the seeds of serious political conflict.
The solution that Europe is about to put in place will be effectively dictated by Germany, whose sovereign credit is necessary for any solution. France's efforts to influence the outcome are ultimately limited by its dependence on its close alliance with Germany for its AAA sovereign ratings.
Germany blames the crisis on the countries that have lost competitiveness and run up their debts. Consequently, Germany places all the burden of adjustment on debtor countries. But this ignores Germany's major share of responsibility for the currency and banking crises, if not for the sovereign debt crisis.
When the euro was introduced, it was expected to bring about convergence among eurozone economies. Instead, it brought about divergence. The European Central Bank treated all member countries' sovereign debt as essentially riskless, and accepted their government bonds at its discount window on equal terms. This induced banks that were obliged to hold riskless assets in order to meet their liquidity requirements to earn a few extra basis points by loading up on the weaker countries' sovereign debt.
This lowered interest rates in the so-called PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) and inflated housing bubbles just as reunification costs were forcing Germany to tighten its belt. This caused both the divergence in competitiveness and the banking crisis in Europe, which affected German banks more than others."
To read the op-ed in full, please click here.
(Published in partnership with Project Syndicate.)