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Soros on the European economy « Previous | |Next »
July 11, 2010

As Daniel Gros points out at Project Syndicate Europe continues to constitute the epicenter of Act II of the global financial crisis, which has now mutated into a sovereign-debt crisis within the eurozone. The distressed economies of Greece, Spain, Ireland and Portugal, have been and are, in the sights of international financial markets.

The problems that underlie the crisis (the precarious state of Greek public finances and that of the Spanish real estate sector) have not been solved. Secondly, EU’s banking system is weakly capitalized that it cannot take any losses, while also being so interconnected that problems in one country quickly put the entire system at risk.

George Soros, in The Crisis & the Euro at The New York Review of Books, says that getting the European economy on a new, better course after the global financial crisis is running into difficulties:

The situation is eerily reminiscent of the 1930s. Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banking system and the economy may not be strong enough to do without fiscal and monetary stimulus. Keynes taught us that budget deficits are essential for countercyclical policies in times of deflation, yet governments everywhere feel compelled to reduce them under pressure from the financial markets. Coming at a time when the Chinese authorities have also put on the brakes, this is liable to push the global economy into a slowdown or possibly a double dip. Europe, which weathered the first phase of the financial crisis relatively well, is now in the forefront of causing the downward pressure because of the problems connected with the common currency.

The fiscal cuts in Germany mean deeper fiscal cuts in Greece and Spain:-- a baffling policy choice at a time when Germany should be using its room for fiscal maneuver and its economic clout to create and enhance the demand that peripheral Europe needs in order to grow out of its misery.

Soros adds that:

Even more troubling is the fact that Germany is not only insisting on strict fiscal discipline for weaker countries but is also reducing its own fiscal deficit. When all countries are reducing deficits at a time of high unemployment they set in motion a downward deflationary spiral. Reductions in employment, tax receipts, and exports reinforce each other, ensuring that the targets will not be met and further reductions will be required. And even if budgetary targets were met, it is difficult to see how the weaker countries could regain their competitiveness and start growing again because, in the absence of exchange rate depreciation, the adjustment process would require reductions in wages and prices, producing deflation.

He adds that as long as there is no growth, the relative weight of the debt will continue to grow not only for the national debt but also for the commercial loans held by banks. This will make the banks even more reluctant to lend, compounding the downward pressures.

Adding to this is the possibility that global demand growth will not be sufficiently strong to support a self-sustained recovery in the eurozone. The future may be bleak for those western countries that have enjoyed centuries of economic and political domination. Their relative power is in decline and their relative economic position continues to deteriorate.

| Posted by Gary Sauer-Thompson at 6:47 PM | | Comments (2)


Stephen D. King in Losing Control:The Emerging Threats to Western Prosperity suggests that the decades ahead will see a major redistribution of wealth and power across the globe that will force consumers in the United States and Europe to stop living beyond their means.

Stephen King eh? Peter S Stock?
Sounds like a real horror story to me (wry).
Why do I think Friedman and Thatcherism and the gloomy deflation/stagflation of '75-85, all over again?
Sounds like the reproduction of the base in terms comprehensible and orderable to the bourgeoisie with a bit a superstructural flummery hastily thrown up to lipstick the process.