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Friday, May 25, 2012

George Soros - a serious man?

George Soros recently made the following statement:

“The Germans have to decide if they want the euro or not,” Soros said. “If they do, then they have to make the transfers. If not, they should leave [the currency zone].”

As an Austrian, I have no particular desire to defend Germans or Germany. And it would certainly be presumptuous of me to state that Mr. Soros is totally wrong.

The above is a good slogan. Like all good slogans, it sounds very good. Like many good slogans, it makes no sense. If someone says something which makes no sense, he is totally wrong. But that I can't say because then I would be saying that Mr. Soros is totally wrong and that would be presumptuous on my part.

Wanting the Euro means for surplus countries having to make transfer payments? Come again, Mr. Soros? Wanting surpluses (not the Euro!) means having to make transfers!

A surplus country (current account surplus) by definition must be an exporter of capital. That has absolutely nothing to do with the Euro. All the Euro does (perhaps) is to make it easier for Germany to incur surpluses. But Germany still has the free choice whether or not to export capital. If it didn't want to export capital, it would have to reduce its surpluses. Having the cake and eating it won't work!

The inexcusable mistake of Mr. Soros is that he suggests that national surpluses/deficits in external accounts can go on forever. They can't, because a country's current account deficit is nothing other than the transfer of wealth from it to the rest of the world. Mathematics would suggest that, at some point, all wealth is gone. Mr. Soros, of course, understands this very well. By intentionally ignoring it and replacing it with good slogans only suggests that he is pursuing ulterior motives.

Perhaps Mr. Soros' views are colored by the experiences of the US. The US have so much domestic wealth and so many domestic investment opportunities that the country will be able to run external deficits for a long, long time to come. Forever perhaps? No way! And if you don't believe that, please read Warren Buffett's beautiful tale about this.

The problem of the Eurozone is that the balances of product and capital flows have come out of whack. An economic policy for the EZ would be a policy which brings those balances more or less back in line again.

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