George Soros’s (incomplete) proposal to save Europe

George Soros has formulated one more call for Eurobonds here.

I’m in agreement with most of it.  Yet, not all.

  • Divergence in the Eurozone was largely caused by Germany not complying with the 2% inflation rule. Deflation, ever since 1999, gave Germany a means to lower the real exchange rate and steal demand from its partners (beggar-thy-neighbor).
  • There is nothing good with Greece running a surplus: A surplus means that financial assets owned by the private sector are reduced by the same amount (as a matter of accounting).
  • Eurobonds would compare well with U.S. Treasuries if and only if the ECB agreed to be the lender of last resort of the Eurozone
  • Remedying the euro’s main design flaw requires more than Eurobonds: There must be, at a minimum, a means to let automatic fiscal stabilizer work. Today, fiscal stabilizers cannot work and fiscal policy is pro-cyclical, as described in the chart here.
  • Hitler was the outcome of harsh reparations plus the 1931 crisis that was caused by austerity and the Reichsbank not willing to fund German Treasuries for fear of inflation.