Germany’s Europe deficit

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

The policies currently being imposed on the euro zone directly contradict the lessons learned from the Great Depression of the 1930s and risk pushing Europe into a period of prolonged stagnation, generating discontent and social unrest, argues financial guru George Soros.

The following commentary was authored by George Soros.

"Germany used to be at the heart of European integration. Its statesmen used to assert that Germany had no independent foreign policy, only a European policy. After the fall of the Berlin Wall, its leaders realised that German reunification was possible only in the context of a united Europe, and they were willing to make some sacrifices to secure European acceptance. Germans would contribute a little more and take a little less than others, thereby facilitating agreement.

Those days are over. The euro is in crisis, and Germany is the main protagonist. Germans don't feel so rich anymore, so they don't want to continue serving as the deep pocket for the rest of Europe. This change in attitude is understandable, but it has brought the European integration process to a halt.

By design, the euro was an incomplete currency at its launch. The Maastricht Treaty established a monetary union without a political union – a central bank, but no central treasury. When it came to sovereign credit, eurozone members were on their own.

This fact was obscured until recently by the European Central Bank's willingness to accept the sovereign debt of all eurozone members on equal terms at its discount window. As a result, they all could borrow at practically the same interest rate as Germany. The banks were happy to earn a few extra pennies on supposedly risk-free assets and loaded up their balance sheets with the weaker countries' government debt.

The first sign of trouble came after the collapse of Lehman Brothers in September 2008, when the European Union's finance ministers decided, at an emergency meeting in Paris that October, to provide a virtual guarantee that no other systemically important financial institution would be allowed to default. But German Chancellor Angela Merkel opposed a joint EU-wide guarantee; each country had to take care of its own banks.

At first, financial markets were so impressed by the guarantee that they hardly noticed the difference. Capital fled from the countries that were not in a position to offer similar guarantees, but interest-rate differentials within the euro zone remained minimal. That was when countries in Eastern Europe, notably Hungary and the Baltic States, got into trouble and had to be rescued."

To read the op-ed in full, please click here.

(Published in partnership with Project Syndicate.)

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