September 11, 2012
Many heavily indebted European governments are reducing their budget deficits at the same time as their economies shrink so that the debt burden as a percentage of GDP actually increases and they are forced to pay hefty risk premiums for access to funds. The real economy of the eurozone is in decline, Germany is doing relatively well, and the political and social dynamics are working toward disintegration.
In his The Tragedy of the European Union and How to Resolve It in the New York Review of Books George Soros says that:
The policies pursued under German leadership will likely hold the euro together for an indefinite period, but not forever. The permanent division of the European Union into creditor and debtor countries with the creditors dictating terms is politically unacceptable for many Europeans. If and when the euro eventually breaks up it will destroy the common market and the European Union. Europe will be worse off than it was when the effort to unite it began, because the breakup will leave a legacy of mutual mistrust and hostility. The later it happens, the worse the ultimate outcome. That is such a dismal prospect that it is time to consider alternatives that would have been inconceivable until recently.
In his judgement the best course of action is to persuade Germany to choose between becoming a more benevolent hegemon, or leading nation, or leaving the euro. In other words, Germany must lead or leave.
Soros argues that Germany has been thrust into a position where its attitude determines European policy. The primary responsibility for a policy of austerity pushing Europe into depression lies with Germany. As time passes, there are increasing grounds for blaming Germany for the policies it is imposing on Europe. Soros adds that the European Union that will emerge from this process of resolving the crisis :
will be diametrically opposed to the idea of a European Union that is the embodiment of an open society. It will be a hierarchical system built on debt obligations instead of a voluntary association of equals. There will be two classes of states, creditors and debtors, and the creditors will be in charge. As the strongest creditor country, Germany will emerge as the hegemon. The class differentiation will become permanent because the debtor countries will have to pay significant risk premiums for access to capital and it will become impossible for them to catch up with the creditor countries.
The prospect of a prolonged depression and a permanent division into debtor and creditor countries will result in the periphery seething with resentment, anger and hostility.