Speaker’s Introduction:
* Othmar Issing, the Center of Financial Studies’ president, introduces George Soros, a renowned figure in the world financial markets and a notable philanthropist.

Soros’ Background:
* Born in Hungary in 1930, Soros experienced two totalitarian regimes.
* Karl Popper’s work, “The Open Society and Its Enemies,” significantly influenced Soros after his escape to England.

Soros’ Philanthropic Endeavors:
* Established Central European University in 1991.
* Founded the Open Society Institute in 1995.
* Recently launched the Institute of New Economic Thinking.
* Donated over $8 billion to support human rights and freedom of expression in over 100 countries.

Issing’s Personal Encounter with Soros:
* Issing’s first interaction with Soros occurred shortly after Soros’ attack on the Pound Sterling in 1992.
* Issing responded to media inquiries by inviting Soros to attack the Deutschmark, which Soros declined.

Lecture Topic:
* Soros’ lecture focuses on how to save the European Union from the ongoing Euro crisis.

Audience Engagement:
* Soros will present his views, followed by a brief exchange of ideas with Issing.
* The audience will then have an opportunity to ask questions and engage in a discussion.

Common Ground:
* Issing and Soros agree on the importance of open debate and discussion, even when viewpoints differ significantly.

Soros’ Objective:
* Soros aims to address the Euro crisis, acknowledging that it remains unresolved.

Introduction:
George Soros presents a detailed analysis of the European Union (EU) crisis, emphasizing the significant financial and political damage it has caused, as well as the human toll it has taken. The crisis has transformed the EU into a creditor-debtor relationship with no easy escape, leading to political tensions and the risk of disintegration.

Causes of the Crisis:
The euro crisis has both political and financial dimensions, including sovereign debt, banking issues, payment imbalances, and competitiveness divergences. Mistakes and misconceptions have played a crucial role in the crisis, making it self-inflicted and resembling a nightmare.

Germany’s Responsibility:
Soros highlights Germany’s dominant position within the EU, emphasizing that they hold a significant share of the responsibility for the crisis. However, he clarifies that he is not blaming Germany but recognizes that whoever was in charge would have likely made similar mistakes.

The Solution:
Soros presents a simple solution to the crisis: gaining a proper understanding of the problems will lead to practical solutions.

The European Union as an Open Society:
Soros expresses his belief in the European Union as an embodiment of an open society, valuing democracy, individual freedom, human rights, and the rule of law. He acknowledges the bold project of EU integration and the role of farsighted statesmen in driving it forward.

The Evolution of the European Union:
The European Union has gone through stages of integration, starting with the coal and steel community and gradually expanding to include more member states. The reunification of Germany and the Maastricht Treaty accelerated the integration process.

Flaws in the Maastricht Treaty:
Soros identifies fundamental flaws in the Maastricht Treaty, particularly the creation of a currency union without a political union. He highlights the risk of default for member countries indebted in a currency they do not control, similar to third world countries borrowing in foreign currencies.

The Financial Crisis and Its Impact:
The financial crisis of 2007-8 exposed the risk of default and the perverse incentives created by treating government bonds as riskless. The convergence of interest rates led to economic divergences, with periphery countries experiencing real estate booms and Germany undertaking structural reforms to enhance competitiveness.

The Lack of Political Will:
Following the financial crisis, there was a lack of political will to take the next step towards fiscal and political union, which would have mitigated the crisis. Germany’s declaration that each country should look after its financial institutions individually marked the beginning of a disintegration process.

Conclusion:
Soros hopes to get Germany to reconsider its policies before they cause further damage, emphasizing the immense human suffering caused by the crisis. He believes that a proper understanding of the issues will lead to practical solutions, preventing a tragic disintegration of the European Union.

Crisis Parallels:
The Eurozone crisis mirrors the 1982 international banking crisis, where commercial banks with high exposure to weaker Eurozone countries’ bonds faced potential insolvency. Both crises involved the linking of sovereign debt and banking crises, creating a vicious cycle.

History Repeating:
Like the IMF in 1982, Germany is aiding indebted countries to avoid default, but this approach has resulted in a lasting depression in debtor nations.

Shifting Blame:
The crisis narrative assigns blame solely to the periphery countries, neglecting the euro’s structural flaws and Germany’s role as a creditor. Systemic issues are overlooked, and the focus remains on fiscal discipline and work ethic in debtor countries.

Systemic Roots of the Crisis:
The euro’s structure has contributed to the crisis, turning countries like Italy and Spain into third world debtors in a foreign currency. Germany’s Schuld (debt and guilt) concept influences public opinion, justifying austerity measures.

Political vs. Financial Conflict:
The Italian elections underscore the conflict between financial necessities and political acceptability. France and Germany bear responsibility for the Maastricht Treaty, while Germany’s dominant role post-crisis has created political and financial challenges.

Germany’s Unwillingness to Lead:
Germany avoids assuming full leadership responsibilities, providing only enough support to prevent default but not enough to resolve the crisis. Germany’s austerity policies, while effective in a single country, fail in a collective Eurozone context.

Ineffectiveness of Austerity:
Austerity measures in the Eurozone have failed to reduce debt burdens due to inadequate demand and a negative impact on GDP. The “fiscal multiplier” effect exacerbates the situation, making budget cuts counterproductive.

Euro Crisis Escalation and Mario Draghi’s Intervention:
The euro crisis reached a critical point, leading to Germany endorsing Mario Draghi for ECB President over Jens Maidmann. Draghi declared the ECB’s commitment to protecting the euro, introducing LTRO and OMT, which reassured financial markets.

Cyprus Bailout and Impact on European Banks:
The Cyprus bailout resulted in bailing in bank depositors, undermining the European banks’ business model reliant on deposits. This event highlighted the potential impact on the banking system, leading to increased risk premiums and a weaker banking union.

Economic Consequences and Germany’s Recession:
The eurozone’s monetary policy, in contrast to other major currencies, led to a deepening depression in the Eurozone. Germany was relatively unaffected initially but faced an upcoming recession due to the yen’s weakness and Germany’s export dependence.

Eurobonds as a Solution:
Soros proposed Eurobonds as a solution, allowing countries adhering to the fiscal compact to convert their government debt into Eurobonds. This would eliminate the risk of default, reduce risk premiums, boost bank balance sheets, and potentially lead to economic growth and surplus budgets. Divergences in competitiveness would remain, but structural reforms could address this issue.

Germany’s Objections and Soros’s Rebuttal:
Germany opposed Eurobonds, fearing that periphery countries would break rules again. Soros argued that under the fiscal compact, new Eurobonds would replace maturing ones, gradually reducing debt to 60% of GDP. Non-compliant countries would face stiff premiums, incentivizing compliance. A tighter fiscal compact could further minimize non-compliance risk.

Eurobonds and Comparisons with the Marshall Plan:
Soros addressed concerns that Eurobonds would harm Germany’s credit rating. He emphasized that Eurobonds involve a guarantee rather than an actual expenditure and that the more convincing a guarantee is, the less likely it is to be invoked.

Limitations of Eurobonds:
Soros acknowledged that Eurobonds alone might not suffice for recovery and that additional stimulus might be needed. He also noted that Eurobonds do not address competitiveness divergences, which would require structural reforms.

Benefits of Eurobonds:
Eurobonds would ensure equal access to credit for all countries within the European Union. Eurobonds would facilitate needed structural reforms in individual countries. Eurobonds would transform the political atmosphere and ease the implementation of reforms.

Germany’s Opposition to Eurobonds:
Germany is adamantly opposed to Eurobonds. Chancellor Merkel’s veto has prevented any consideration of Eurobonds. Eurobonds would be less costly than the minimum measures taken to preserve the euro.

Consequences of Germany Leaving the Eurozone:
Eurobonds issued by a eurozone excluding Germany would be comparable to those of the US, UK, and Japan. Debtor countries would regain competitiveness, and their debt would diminish in real terms. The burden of adjustment would fall on countries leaving the euro, resulting in reduced competitiveness and increased competition in their home markets. Losses would depend on the extent of depreciation, incentivizing countries to keep depreciation within bounds. The eventual outcome would align with Keynes’ vision of a stable international currency system.

Consequences of Italy Leaving the Eurozone:
Italy’s Euro-denominated debt would become unsustainable, requiring restructuring. This would trigger a global financial meltdown and potentially lead to the disintegration of the European Union.

Conclusion:
Germany should consider accepting Eurobonds or leaving the eurozone. Leaving the eurozone would have significant consequences for Germany and the rest of Europe. The choice is up to Germany, but it should be made in the best interests of Europe as a whole.

The Current Situation:
Germany has been reluctant to commit fully to preserving the Euro, opting instead to do the bare minimum to maintain its stability. Chancellor Merkel prefers this approach, at least until after the upcoming elections.

The Author’s Argument:
The author argues that Europe would be better off if Germany chose between accepting Euro bonds or leaving the Euro, rather than continuing its current course of inaction. This is true not only for Europe as a whole, but also for Germany itself, except perhaps in the immediate term. The author believes that Euro bonds would benefit Germany and that the cost of leaving the Euro has been underestimated.

The Author’s Preferences:
The author’s first preference is for Euro bonds, and the second is for Germany to leave the Euro. The author considers both options to be preferable to the current situation of indecision and crisis.

The Importance of the European Union:
The author emphasizes the importance of the European Union, not only for Europe but also for the world. The EU embodies the principles of open society, where mistakes are acknowledged and corrected, rather than blamed. The author believes that Germany should agree to Euro bonds in order to save the European Union and uphold its founding principles.