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Germany’s
resistance to a banking union and stimulus measures is in the way of a solution
to Europe’s debt crisis, and could turn this week’s meeting of the region’s
leaders into a “fiasco”, according to Zionist billionaire investor George Soros.
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| Zionist George Soros |
German
Chancellor Angela Merkel has so far rebuffed all proposals to help relieve
Spain and Italy from the jump in their borrowing costs and has resisted
allowing the European Central Bank (ECB)
to step up buying of peripheral sovereign debt. That poses a threat to
the region’s stability, Soros said in an editorial in the Financial Times on
Monday.
“This
threatens to turn the June (28) summit into a fiasco which may well prove fatal
because it will leave the rest of the euro zone without a strong enough
firewall to protect it against the possibility of a Greek exit,” Soros wrote.
“Even
if a fatal accident can be avoided, the division between creditor and debtor
countries will be reinforced and the “periphery” countries will have no chance
to regain competitiveness because the playing field is tilted against them.”
France
and Italy are urging Germany, the region’s largest economy, to take decisive
action to end the two-and-a-half-year old debt crisis as Spain’s 10-year bond
yields jumped to more than 7 percent last week. Merkel has opposed “premature”
proposals for issuing euro-area bonds backed by the ECB, arguing that such debt
can’t be sold until there is a full fiscal union for the region.
This
is however “unrealistic and unreasonable”, Soros said, adding that a political,
fiscal and banking union have to be “developed together step-by-step”.
The
first step towards this would be for the EFSF (European Financial Stability
Fund) to immediately take over the ECB’s holdings of Greek bonds, and the ECB
to start buying Spanish and Italian bonds. This will calm financial markets and
pave the way for a political and banking union, Soros said.
Concerns
over Europe, particularly Spain’s and Italy’s ability to finance their debt,
caused the two nations’ bond yields to spike earlier in the week. They have
since retreated, aided by speculation that European leaders will take action at
the Brussels meeting on Thursday.
Spain’s
10-year-bond yields retreated to 6.38 percent on June 22 and comparable Italian
yields slid to 5.8 percent after climbing to as much as 6.17 percent on June
18.
A
longer-term solution has to be found for the crisis in Europe, Soros said, and
he proposed a so-called European Fiscal Authority (EFA) to be set up to buy
Spanish and Italian bonds in exchange for structural reforms.
Under
Soros’ proposal, this fund will buy the bonds with European Treasury Bills
issued and backed by the ECB and every euro zone member-nation. These Bills
would therefore receive a zero-risk weighting from regulators and have very low
yields.
There
should be plenty of demand for the Treasury Bills, especially from banks which
urgently need risk-free liquid assets, Soros added.
“Banks
are currently holding more than 700 billion euros ($878 billion) of surplus
liquidity at the ECB, earning only one quarter of one per cent interest,” Soros
said. “This assures a large and ready market for the Bills at one percent or
less.
The
EFA would also have the authority to impose a fine or other form of penalty
should a participating country fail to live up to its commitments, Soros said,
adding that the countries would then have to agree on debt reduction programs,
which would not jeopardize economic growth.
This
should pave the way towards banking, fiscal and political union and the German
parliament should not be in the way of such a solution, Soros said.
“If
the rest of Europe is united behind this proposal and the Bundestag (German
parliament) rejects it, Germany must take full responsibility for the financial
and political consequences,” he warned.
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