Soros attacks Germany’s hair-shirt politics

German daily Die Zeit published comments from an interview with famed US hedge fund investor George Soros who was sharply critical of German economic policy.  Soros claimed that Germany was "isolated" in its austere interpretation of the Maastricht Treaty and that this would lead to economic collapse.

Below are a few of the comments Soros made:

• "Die deutsche Politik ist eine Gefahr für Europa, sie könnte das europäische Projekt zerstören" [German policies are a danger for Europe which could destroy the European project]
• "Wenn die Deutschen ihre Politik nicht ändern, wäre ihr Austritt aus der Währungsunion für den Rest Europas hilfreich." [If the Germans don’t change their policies, their departure from the common currency would benefit the rest of Europe]
• "Im Moment treiben die Deutschen die Nachbarn in eine Deflation: Es droht eine lange Phase der Stagnation. Und die führte zu Nationalismus, zu sozialen Unruhen, zu Fremdenfeindlichkeit. Sie gefährdet also die Demokratie" [At the moment, the Germans are causing deflation for their neighbours, which will lead to a long period of stagnation. And that leads to nationalism, social unrest, and xenophobia. This is a threat to Democracy.]

Pretty harsh words.  Here’s my view.  Soros is correct that deflation and depression lead to economic nationalism as I have made such comments in the past. Here are two examples:

• The US Economy 2008: A positive outcome to this process is dependent wholly on liquidation of excess credit and consumption.

  This process will be extremely painful in the short term, but will lead to a healthy economy long-term. Unfortunately, experience shows that these painful steps will only be taken as a last resort. Moreover, geopolitical events become volatile in a world of economic insecurity, leading to political upheaval and protectionism. Protectionism is a natural outgrowth of nationalist economic policy as it transfers wealth from foreign producers to domestic producers by cutting off access to lower cost excess capacity in the goods in service sectors.

• Confessions of an Austrian economist: It is in such a bleak environment that dangerous despots and dictators like Hitler and Mussolini rose to power, taking advantage of the natural human need for ’strong’ leader in a time of chaos and uncertainty.  Could we expect any different today?

And Soros’ own personal history is shaped by the economic nationalism of the 1930s and 1940s as a Hungarian Jew threatened by the Nazis.

Nevertheless, some of what he says is inaccurate. First, the Germans are not isolated at all. All of Europe is taking to austerity.  The remarks by the British Chancellor George Osborne before the House of Commons yesterday speak to this most clearly. Moreover, the German Chancellor Angela Merkel is in fact threatening to re-institute the Deutsche Mark if French press accounts of her recent meeting with French President Sarkozy are to be believed. Be careful what you wish, as a euro zone breakup could have unforeseen consequences. (video in German below recounting the rumours)

Finally, from a political perspective, Merkel has been conciliatory. The German populace is very anti-bailout, anti-deficit. They are not happy with the easy money policies of the ECB, one reason they are taking to gold. In February, as the Greek crisis became an event, I wrote that The Germans will not bail out Greece. I added a ‘weasel clause’ at the end of the post which allows me to claim I was right all along:

I see it as unlikely that any deal – bailout via the EU, IMF bailout or backdoor help via quasi-fiscal measures from the ECB – can be reached unless Greece agrees to austerity measures. While this is the Eurozone – and that makes a difference – countries like Latvia will be looking to determine if Greece gets differential treatment.  And Spain, Portugal or Ireland would then be next in line. Any agreement must take these factors into account.

But, I was wrong. The title of the February post goes to the attitude in Germany and my thinking of outcomes at the time. Merkel has clearly gone against this. She is suffering politically as a result. Read Ludwig Erhard’s comments in this post from Mises Online and that gives you a better sense of what the German elites are thinking today. They want more austerity than Merkel is giving in her budget. Fully 92% of German decision-makers have lost confidence in the government. It is her dovishness that is causing her political problems not her hawkishness.

Where does this lead?  It leads to austerity in Europe with the depressionary consequences for many that this will have. The question is how fragile are the European economy and banking system. Can they stand up to austerity?  Get your hair-shirt on. Soon we shall find out.

Sources:

• Soros sieht deutsche Sparpolitik als Gefahr für Europa – Die Zeit
• Support for Merkel coalition falls to record low – National Post