June 29 (Bloomberg) — George Soros has been making what he calls a "grave accusation" against Germany. The financier-philanthropist said last week that Germany is endangering the European Union by keeping wages down and pursuing a balanced national budget too aggressively. Germany's parsimonious attitude, Soros suggests, may bring down the euro.
You get the feeling that Soros is speaking directly to Angela Merkel, trying to give the German chancellor a kindly tutorial. In a speech at Humboldt University, Soros said that Germany had understandable reasons for pursuing thrift. But, he added, the country should spend more and advocate aggressive spending and looser money by the European Investment Bank and the European Central Bank, respectively.
Soros implied that Germany should look to the U.S., where President Barack Obama has spent vigorously and Federal Reserve Chairman Ben Bernanke has created money for the greater good. Soros, the tutor again, underscored that Germany clearly "does not know what it is doing."
It is time to turn the question around, and make a grave accusation against Soros. It is Soros who is endangering the euro by advocating these spending and loosening policies. They are policies that may give Europe budget problems that render its currency vulnerable to attack by Soros-like traders. Perhaps, like Merkel, Soros is doing his endangering for understandable reasons. Nonetheless, the danger is there, and worth laying out.
Start with the euro's creation, as Soros has. Europe unified its monetary policy through the euro before it unified politically, therefore sustaining member countries' abilities to pursue the kind of independent fiscal policies that can strain a joint currency.
Soros labels this construct "patently flawed." Clever is another way to describe it. The enormous carrot of access to the euro-land market incentivizes nations to apply the stick of fiscal discipline to themselves. Under that plan, countries that fail to apply the stick with alacrity face the unpleasant choice of initiating extraordinary tax increases and budget cuts to curtail debt or being forced out of the monetary union.
That happened to the U.K. back in the early 1990s, when Soros cost the country $3 billion while he made $1 billion by forcing Britain out of the European Exchange Rate Mechanism, the euro precursor.
What Merkel Knows
As a former East German, Merkel has visceral knowledge of the enormous waste of human capital that takes place in countries lacking good currencies. Because the East German mark of her young adulthood was a political fantasy rather than a genuine currency, scientists such as Merkel couldn't purchase the equipment they needed to compete with Western scientists.
Germans like Merkel recall better than Americans what happened when Soros's raiders hit the U.K., so they know how brutally any non-dollar currency, even the currency of a regional leader, can be brought down.
Beyond Merkel's personal memory there is the German national memory of the 1920s hyperinflation. That resulted from the decision of a desperate Weimar Republic to inflate its way out of war debts. That hyperinflation so punished middle-class savings and so weakened the 1920s economy that the average German became more susceptible to maniacs like Adolf Hitler and the communists.
Pressure on Germany from Soros, and for that matter, from the Obama administration, makes it harder for Merkel or other European leaders to heed their own sound instincts. Soros's pressure also obscures a desirable policy path for Germany, one in which it practices fiscal discipline and growth creation so well that other euro nations emulate it.
The Keynesian argument that the choice is binary, between spending and pain, is untrue. For one thing, deflation isn't always painful — in the 1920s, even as Germany agonized, the U.S. thrived during an American deflation. Budget tightening, especially in combination with competitive tax codes, may put all Europe on a growth path that renders its currency a true competitor for the role of global leader over the long run.
The best defense of Soros is that Soros-recommended stimuli by Germany and in euro-land will indeed yield strong growth, and prevent one recession, just as he says. But what happens after that recovery? Europe, like the U.S., isn't growing fast enough to continue spending its way out of every recession. It is likely that German-tolerated euro-spending on a big scale in 2010 or 2011 would render Europe's nations the very sort that vulnerable currency traders specialize in annihilating.
The Obama administration for its part is being disingenuous when it makes spending recommendations. As my colleague Sebastian Mallaby at the Council on Foreign Relations notes, the dollar's status as the currency of reserve amounts to a sort of Kevlar vest against the bullets of currency raiders. The euro possesses no vest.
Soros wants to help the Obama administration and the Keynesian spending that Democrats favor. If Europe spends, that makes the U.S. look less isolated. A big spending Europe also makes the euro less of a threat to the dollar. In any case, it is hard to imagine that what Soros alleges about Germany is true for Soros: that he just doesn't understand what he is doing.
(Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)
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