Thinking the unthinkable in Europe

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

The EU should prepare for the possibility of the default or defection from the euro zone of some of its members, something which if prepared correctly would not cause a financial crisis and would allow the countries concerned to escape the vicious cycle of austerity and recession, argues George Soros.

George Soros is a prominent financier, philanthropist and political activist. He chairs Soros Fund Management and the Open Society Institute.

"To resolve a crisis in which the impossible has become possible, it is necessary to think the unthinkable. So, to resolve Europe's sovereign-debt crisis, it is now imperative to prepare for the possibility of default and defection from the euro zone by Greece, Portugal and perhaps Ireland.

In such a scenario, measures will have to be taken to prevent a financial meltdown in the euro zone as a whole. First, bank deposits must be protected. If a euro deposited in a Greek bank [were] lost through default and defection, a euro deposited in an Italian bank would immediately be worth less than one in a German or Dutch bank, resulting in a run on the deficit countries' banks.

Moreover, some banks in the defaulting countries would have to be kept functioning in order to prevent economic collapse. At the same time, the European banking system would have to be recapitalised and put under European, as distinct from national, supervision.

Finally, government bonds issued by the euro zone's other deficit countries would have to be protected from contagion (the last two requirements would apply even if no country defaulted).

All of this would cost money, but, under the existing arrangements agreed by the euro zone's national leaders, no more money is to be found. So there is no alternative but to create the missing component: a European treasury with the power to tax and, therefore, to borrow. This would require a new treaty, transforming the European Financial Stability Facility (EFSF) into a full-fledged treasury.

But this presupposes a radical change of heart, particularly in Germany. The German public still thinks that it has a choice about whether to support the euro. That is a grave mistake.

The euro exists, and the global financial system's assets and liabilities are so intermingled on the basis of the common currency that its collapse would cause a meltdown beyond the capacity of the German authorities – or any other – to contain.

The longer it takes for the German public to realise this cold fact, the higher the price that they, and the rest of the world, will have to pay.

The question is whether the German public can be convinced of this argument. Chancellor Angela Merkel may not be able to persuade her entire coalition of its merits, but she could rely on the opposition to build a new majority in support of doing what is necessary to preserve the euro. Having resolved the euro crisis, she would have less to fear from the next election."

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

Published in partnership with Project Syndicate

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