Introduction:
George Soros expressed his concern about the ongoing euro crisis and its potential to destroy the European Union. He emphasized the urgent need for a lasting solution to address the division between creditor and debtor countries.

Critique of Current Policies:
Soros criticized the policy of fiscal retrenchment amid rising unemployment, stating that it is pro-cyclical and pushing Europe into a deeper and longer depression. He highlighted the lack of coherent policymaking and the Bundesbank’s insistence on imposing austerity on debtor countries, leading to counterproductive outcomes.

Unintended Consequences of the Crisis:
Soros pointed out the unintended benefits for creditor countries, such as Germany, which enjoy a competitive advantage and attract human and financial resources from the periphery. He expressed concern that this could lead to a permanent two-tier Europe, with a depressed periphery and a prosperous core.

Political and Economic Implications:
Soros warned that the division of Europe into creditor and debtor countries could lead to political revolt and the eventual breakup of the Eurozone, which would destroy the common market and the European Union. He emphasized that a permanently divided Eurozone is politically unacceptable and would have severe consequences for Europe.

Proposed Solution:

Soros presented a two-step solution to address the crisis:
1. Activate the Debt Reduction Fund recommended by the Chancellor’s Council of Economic Advisers to create a level playing field.
2. Stop imposing pro-cyclical austerity measures during the recession to prevent a depression.

Potential Outcomes:
Soros suggested that if Germany left the Eurozone, the euro would depreciate, allowing debtor countries to regain competitiveness, reduce their debt burden, and escape the threat of default. He also proposed that Germany could behave as a benevolent hegemon and take these steps to save the euro, fulfilling John Maynard Keynes’ dream of an international currency system where creditors and debtors share responsibility for stability.

Progress and Remaining Steps:
Soros acknowledged the positive shifts in the political debate in Germany, such as the creation of a banking union and the bond-buying program announced by the ECB. He emphasized the importance of accepting the two remaining steps of his proposed solution to achieve a lasting solution to the euro crisis.

Germany’s Options:
Remain in the Euro by accepting additional liabilities. Negotiated withdrawal from the Euro with creditor countries. Hold a referendum to decide whether to lead or leave the Euro.

Consequences of Not Taking Further Action:
Destruction of the European Union. Prolongation of the Euro crisis and its negative effects.

German Public Sentiment:
Germans feel punished for their economic success and reforms. Resentment towards Southern European countries that benefited from their gains but avoided their pain.

Comparison to the United States After World War II:
Germany’s position is similar to the US after World War II, as a victor with a strong currency. The US lived up to its responsibility with the Marshall Plan, earning lasting loyalty from Europe.

Marshall Plan Benefits:
Misunderstanding about the percentage of GDP spent on the Marshall Plan. Germany has benefited from the divergence in exchange and interest rates, outweighing the costs of the crisis.

Soros’ Comparison to the 1982 Banking Crisis:
George Soros draws a parallel between the Euro crisis and the international banking crisis of 1982. In both cases, a system (Eurozone or banking) needed rescuing, and hardship was imposed on debtors to protect creditors. Soros believes a similar rescue occurred in Greece, prioritizing the banking system’s protection.

Success and Failure Scenarios:
Soros suggests that if Greece had turned around, there would have been no additional cost. However, if Greece fails, there will be a cost. If Germany allowed the debt reduction fund to succeed, it would come at no cost to Germany.

German Discomfort:
Jonas Müller highlights German discomfort with the Eurozone situation, feeling overburdened by contributions and guarantees. Germans fear potential risks and liabilities building up.

Soros’ Suggestion:
Soros recognizes German public sentiment and suggests that if the majority feels this way, Germany should leave the Eurozone. He believes that without Germany’s resistance, it would be easier for better-performing countries to convert to Euro bonds and borrow more affordably.

Bundesbank’s Approach to Stability:
Bundesbank interprets stability solely in terms of fighting inflation, disregarding the danger of deflation. This narrow perspective is in contrast to other central banks worldwide, which have acknowledged the risks of deflation and engaged in quantitative easing measures.

Role of the ECB and Democratic Control:
Mario Draghi’s actions as ECB President have made him the most powerful politician in Europe, aside from Angela Merkel. This raises concerns in Germany about the lack of democratic control over the ECB and its policies.

Need for a Fiscal Authority:
The current stopgap solution, where the ECB acts without a proper fiscal authority, is inadequate. A complete currency requires both a central bank and a fiscal authority acting in cooperation.

ESM as a Partial Solution:
The European Stability Mechanism (ESM) is a step towards a fiscal authority but is unwieldy and cannot respond effectively to market pressures.

Draghi’s Bond-Buying Program:
Mario Draghi’s bond-buying program has worked as a stopgap measure to prevent the collapse of the euro. However, it is a step towards legalizing the two-tier Europe by requiring agreements with Germany-controlled entities to activate the program.

EZB and ESM Connection:
Debate within the EZB: How close should the connection be between the EZB’s actions and the ESM? Unclear if countries seeking EZB bond buying must first seek help from the ESM. Draghi’s declaration suggests a conditionality on the EFSF program.

Fiscal Authority and Debt Reduction Fund:
Need for fiscal authority to address moral hazard concerns. Debt Reduction Fund proposed as a means to punish countries that disobey.

Political Union and Eurozone Split:
Gradual movement towards fiscal and political union seen as necessary. Difficulty in rebuilding trust among member states. Potential need to split the eurozone into a debtors’ euro and a creditors’ Deutschmark.

Schuld and German Responsibility:
“Schuld” in German has dual meaning of guilt and debt. Argument that Germany has a responsibility to save Europe or leave the Eurozone. Questioning of German guilt for issues like Greek corruption and Spanish banking problems.

Market Fundamentalism and the 2008 Crash:
Critique of market fundamentalism and the belief that markets always tend towards equilibrium. Recognition that the private sector is prone to instability. The 2008 crash as evidence against market fundamentalism.

Concerns about Deflation:
Identification of German fear of inflation as misplaced. Argument that deflation is a bigger problem than inflation. Difficulty in convincing the German public and Spiegel about the significance of deflation.

Germany’s Ongoing Debate:
Soros acknowledges the ongoing debate in Germany and believes it is more informed than discussions he has engaged in America. He expresses hope that presenting a coherent case to the German public will lead to their acceptance of necessary changes.

Germany’s Role and Approach:
Lothar Hart, a participant, argues that Germany has been actively involved in supporting the euro and is not doing nothing, as is often portrayed. Soros clarifies that he believes Germany has done the minimum necessary to hold the euro together, which is insufficient and counterproductive.

The Need for Maximum Effort and Growth:
Soros emphasizes the importance of doing the maximum to resolve the crisis rather than the minimum. He asserts that a more comprehensive approach with higher potential liability would ultimately result in no loss due to nominal growth and debt reduction.

Policy Issues:
Soros highlights the problem with Germany’s policy being counterproductive, leading to a worsening of the situation. He stresses that Germany’s dictation of policy would be acceptable if it were productive and led to a solution.

The Role of Structural Reforms:
Soros acknowledges the need for structural reforms in individual countries, such as in social security and labor markets. However, he emphasizes that structural reforms alone are insufficient and must be accompanied by addressing the fundamental flaws in the euro’s structure.

Duration of the Crisis:
In response to a question, Soros states that the duration of the crisis depends on the implementation of structural reforms. He suggests that with reforms, a positive scenario could emerge within a reasonable timeframe, while the absence of reforms would prolong the crisis.

Structural Reforms and the Length of the Crisis:
The duration of the crisis in Europe will depend on the implementation of structural reforms. Previous crises, such as the Latin American banking crisis of 1982 and the collapse of the Japanese real estate boom, show that economic recovery can take a long time. Pro-cyclical policies, which exacerbate the crisis, should be avoided in favor of counter-cyclical policies.

Government Debt and Counter-Cyclical Policies:
The presence of government debt complicates the implementation of counter-cyclical policies. In the 1930s, Keynes argued that government spending could stimulate demand regardless of its purpose, as there was minimal government debt. Today, the challenge is to eliminate pro-cyclical policies and prevent further deterioration of the economic situation.

Soros’s Involvement in the Crisis:
Soros has followed the crisis since its inception and has written articles at each stage suggesting potential solutions. He believes that the crisis could have been stopped earlier with less effort if convincing measures had been taken. The recent steps taken by Draghi at the Central Bank and the creation of the banking union are positive developments.

The Significance of Draghi’s Actions:
Draghi’s insistence on unlimited intervention has been convincing to the markets and has helped to stabilize the situation. Such interventions can result in a profit if distressed assets are bought and sold at a higher price later.

The Importance of Resolving Doubts About the Euro:
The recent steps taken have helped to relieve doubts about the existence of the euro. This is a significant improvement, as it brings Europe closer to an actual turning point in the crisis.

Europe’s Three-Step Debt Reduction Plan:
Europe’s debt reduction plan requires three steps: creating a level playing field through debt reduction, avoiding pro-cyclical austerity programs, and ensuring that markets are functioning properly.

Selling State Bonds to the Public:
Central banks in certain countries sell state bonds to institutional investors like Goldman Sachs and Deutsche Bank at high interest rates, while the general public would be willing to buy them at lower rates. However, the market is currently experiencing fear, uncertainty, and a lack of trust, leading to this market failure.

Leadership Qualities Needed to Address the Crisis:
To address the crisis, Europe needs a strong leader with a clear set of values, excellent communication skills, and the ability to engage the public. Angela Merkel is a good democratic leader who follows public opinion, but she lacks the necessary vision and understanding of finance and economics to provide a clear path out of the crisis.

France’s Political Aspirations:
France’s political class desires to be a global player, and a division of Europe into a Latin Euro and a northern bloc would fulfill this aspiration. France could lead the Latin Bloc and maintain competitiveness, while also cooperating with Germany to keep the Euro together and prevent imbalances between the Northern and Southern blocs.

Germany’s Role and the Historic Tragedy:
Germany needs to realize that doing the minimum to keep the Euro together will ultimately destroy the European Union. However, Germany believes it is already doing the maximum, leading to a misconception and difficulty in finding common ground.

Economic Competitiveness for Southern European Nations:
Long-term economic competitiveness is crucial for Southern European nations to overcome the crisis. Structural and fiscal reforms, along with regaining competitiveness, are necessary for these nations to thrive.

Economic Competitiveness and the Euro:
Leaving the Eurozone would immediately improve the competitiveness of Southern European countries due to exchange rate adjustments, but markets might overreact initially. Eventually, the exchange rate would stabilize, and competitiveness would be restored. However, holding the Eurozone together and implementing additional measures would not solve the competitiveness issue quickly.

Political Consequences of Leaving the Euro:
From a purely economic perspective, leaving the Eurozone is the best solution for Southern European countries. However, politically, it would be a major shock and a significant risk. Therefore, considering the political implications, it might be better to maintain the integrity of the European Union.

Populism and Anti-European Sentiment:
There is a risk that populism and anti-European sentiment will gain traction in Southern European countries. This could lead to a gradual disintegration of the European Union, which would be a destructive process.

Spain’s Position:
The Spanish government is strongly aligned with Germany’s position on the Eurozone crisis, which may not be in Spain’s best interests. Former Spanish Prime Minister Mariano Rajoy requested reinforcement from Germany, particularly a reduction in borrowing costs, but his request was not well received. As a result, Rajoy’s position has been weakened, and he is now considered a lame duck.

Background:
George Soros emphasizes that Germany’s influence in the Euro crisis is fading due to the impending end of Chancellor Merkel’s term and her diminished ability to influence parliament.

Missed Opportunity:
Soros believes that if Germany had taken more proactive measures, such as reducing risk premiums through the ECB’s bond-buying plan, Italy could have seen significant reforms and opportunities.

Germany’s Leadership Potential:
Soros suggests that if Germany assumed a more prominent leadership role by sharing burdens and risking its own credit, it could emerge as the leader of Europe, similar to the United States’ position as the leader of the free world.

Challenges to German Leadership:
However, Soros acknowledges that Germany’s leadership aspirations face growing challenges due to prevailing negative sentiments and mistrust among European countries.

Economic Intelligence and German Thinking:
A question from the Young Scholars Initiative prompts Soros to reflect on German economic thinking. He attributes Germany’s orthodox economic views to traumatic experiences with inflation, particularly in the 1920s, which led to the middle class losing wealth and facilitating the rise of Adolf Hitler.

German Attitudes:
Jonas Müller highlights the German mistrust in debt and their high saving rate compared to other countries. Müller notes that Germany experienced a short-lived housing boom in Berlin and East Germany after reunification, but it did not last as long as in neighboring countries.

Risks of Deflation and Housing Bubble in Berlin:
George Soros expresses concerns about the danger of deflation in Germany and the possibility of a housing bubble developing in Berlin. He attributes this to the flight of capital and negative real interest rates.

Political Consequences of Germany Leaving the Euro:
Soros predicts that if Germany leaves the Euro, it will lead to the eventual breakup of the European Union. Müller emphasizes that Germany’s exit would require a treaty and cooperation with other countries, resulting in an orderly separation.

Positive Developments:
Soros acknowledges positive developments, such as recognizing the link between the banking crisis and sovereign debt crisis, and the move towards a banking union. He highlights the effectiveness of the ECB’s risk premium lid against speculation.

Challenges and Solutions:
Soros suggests that Europe could work itself out if it implements a debt reduction fund, stops pushing debtor countries into deeper debt, and avoids disorderly separation. He emphasizes the need for an orderly separation if Germany leaves the Euro, which would involve interest rate adjustments and cooperation with other countries.

Final Question:
Daniel Wiegand asks about Germany’s potential leadership role in Europe and how it can contribute to solving the current challenges.

Market Regulation: A German Perspective:
Jonas Müller emphasizes the significance of regulatory action by Germany concerning the markets.

Banking Union: A Crucial Step:
George Soros advocates for a European banking regulation system to maintain the integrity of the Euro. He highlights the negative consequences of national regulators’ divergent approaches, leading to national silos and disruptions in the banking system. Interbank transactions have come to a standstill due to regulatory challenges.

Progress in Banking Regulation:
Soros acknowledges the ongoing efforts towards a banking union, describing it as a positive development.

Finnish Central Banker’s Recommendations:
Soros mentions the upcoming report by the Finnish central banker to Commissioner Barnier, proposing a regulatory framework that combines elements from the Vickers Commission in England and the Volcker rules in America.

Conclusion:
Müller expresses gratitude to Soros for the insightful discussion and acknowledges the limited time available. He acknowledges the need for effective leadership to address these challenges.