Soros’s Wisdom and Markets’ Ignorance

In my column this week, I discuss Soros’s headline-grabbing insistence the euro will survive only if Germany “leads or leaves”. My column focuses on his passionate conviction a united Europe’s value goes beyond economics, this is also a political, and even moral, story. When I interviewed him in Vienna, Mr. Soros, who made his billions as a hedge fund manager, also pointed out European crisis illustrated a phenomenon that had long been one of his most powerful investing principles: the markets are sometimes wrong. “Member states, by transferring their right to print money to ECB, effectively exposed themselves to danger of defaulting on their government debt,” Mr. Soros explained. “Because normally a developed country would never default, because it can always print money, but these countries were borrowing in euros and they did not control central bank. And because of that there is a real danger that they would default. “This created a problem exactly because it was not recognized. It was not recognized by markets.” The markets didn’t cotton on until the Greek financial crisis. Then, as in the fable about emperor’s new clothes, nakedness of the existing European construct suddenly became plain to everyone, and eurozone’s woes began. Mr. Soros’s reminder that markets are far from infallible is valuable. As the crisis has unfolded, it has been tempting to view the market reaction to political actions as objective and permanent. But capital flows aren’t governed by natural law. They are governed by human psychology, that will probably be the decisive factor in Europe. (source: Chrystia Freeland – NYTimes – 14/09/2012)



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Consultor Internacional

2 Responses to Soros’s Wisdom and Markets’ Ignorance

  1. Professor Uziel Nogueira says: George Soros is wrong on two points. First, the euro will ONLY survive IF Germany stays in the common currency area. Second, Germany is up front in promoting structural economic reforms that will strength weak economies and make them more competitive in the future. Germany made a huge political mistake in 1999 when it accepted economies not ready for a common currency. The debt crisis has only one outcome. Sooner or later, some countries will leave the euro zone.

  2. (George Soros in The New York Review of Books – 07/09/2012)

    In a fast-moving situation, significant changes have occurred since this article went to press. On August 1, as I write below, Bundesbank President Jens Weidmann objected to the assertion by Mario Draghi, the president of the European Central Bank, that the ECB will “do whatever it takes to preserve the euro as a stable currency.” Weidmann emphasized the statutory limitation on the powers of the ECB. Since this article was published, however, it has become clear that Chancellor Merkel has sided with Draghi, leaving Weidmann isolated on the board of the ECB. This was a game-changing event. It committed Germany to the preservation of the euro. President Draghi has taken full advantage of this opportunity. He promised unlimited purchases of the government bonds of debtor countries up to three years in maturity provided they reached an agreement with the European Financial Stability Facility and put themselves under the supervision of the Troika—the executive committee of the European Union, the European Central Bank, and the International Monetary Fund. The euro crisis has entered a new phase. The continued survival of the euro is assured but the future shape of the European Union will be determined by the political decisions the member states will have to take during the next year or so. The alternatives are extensively analyzed in the article that follows.


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