"Everything
Has Gone Wrong": Soros Warns "Major" Financial Crisis
Is Coming
29
May, 2018
In
a speech delivered Tuesday in Paris, billionaire investor George
Soros warned that the world could be on
the brink of another devastating financial crisis,
as debt crises reemerge in Europe and a strengthening dollar
pressures both the US's emerging- and developed-market rivals.
And
Europe, with Italy dragging worries about the possible dissolution of
the euro back to the forefront, won't be far behind. Political
pressures like the dissolution of its transatlantic alliance with the
US will eventually translate into economic harm. Presently, Europe is
facing three pressing problems: The
refugee crisis, the austerity policy that has hindered Europe's
economic development, and territorial disintegration -
not only Brexit, but the threat that countries like Italy might
follow suit...
“Brexit
is an immensely damaging process harmful to both sides,” the
billionaire exclaimed.
But
in the near-term, the US's decision to pull out of the Iran deal is
straining Europe's alliance with its most important Western partner
just as the strengthening dollar is constricting financial conditions
around the world.
Until
recently, it could have been argued that austerity is working: the
European economy is slowly improving, and Europe must simply
persevere. But, looking ahead, Europe now faces the collapse of the
Iran nuclear deal and the destruction of the transatlantic alliance,
which is bound to have a negative effect on its economy and cause
other dislocations.
The
strength of the dollar is already precipitating a flight from
emerging-market currencies. We
may be heading for another major financial crisis. The
economic stimulus of a Marshall Plan for Africa and other parts of
the developing world should kick in just at the right time. That is
what has led me to put forward an out-of-the-box proposal for
financing it.
Soros's
warning comes as Italian 2Y bond yields shoot higher by the most on
record:
Adding
to the urgency, it is no longer a "figure of speech" to
claim that the EU is in "existential danger," Soros said.
It's an obvious reality.
“The
EU is in an existential crisis. Everything that could go wrong has
gone wrong,” he
said.
To
escape the crisis, “it needs to reinvent itself.”
"The
United States, for its part, has exacerbated the EU’s problems. By
unilaterally withdrawing from the 2015 Iran nuclear deal, President
Donald Trump has effectively destroyed the transatlantic alliance.
This has put additional pressure on an already beleaguered Europe. It
is no longer a figure of speech to say that Europe is in existential
danger; it is the harsh reality."
The
only way to prevent an all-out collapse, Soros explained, would be a
30 billion euro ($35.4 billion) "Marshall Plan" for Africa
that Soros believes would help stem the flow of migrants into Europe,
something that, Soros finally admits, is one of the biggest problems
facing Europe. The EU, Soros believes, should use its "largely
unused" borrowing authority to finance the plan.
“We
may be heading for another major financial crisis,” Soros
said explicitly.
The
alternative, Soros claims, is further "territorial
disintegration" of the EU as countries that have largely
suffered as a result of the monetary union contemplate leaving. To
prevent this, Soros says Europe must acknowledge and address the
flaws of the euro system. Perhaps the most glaring of which is that
the euro created an entrenched two-tiered system of debtors and
creditors.
I
personally regarded the EU as the embodiment of the idea of the open
society. It was a voluntary association of equal states that banded
together and sacrificed part of their sovereignty for the common
good. The idea of Europe as an open society continues to inspire me.
But
since the financial crisis of 2008, the EU seems to have lost its
way. It adopted a program of fiscal retrenchment, which
led to the euro crisis and transformed the eurozone into a
relationship between creditors and debtors. The creditors set the
conditions that the debtors had to meet, yet could not meet. This
created a relationship that was neither voluntary nor equal – the
very opposite of the credo on which the EU was based.
As
some will remember, Soros Fund Management - the family office that
manages Soros's money, which
he has mostly dedicated to
his "Open Society" network of NGOs - closed most of its
long-EM positions after President Trump defeated Hillary Clinton. Of
course, where Soros sees danger, others see opportunity. For example,
Mark Mobius "un-retired" last month to
open a fund that he hopes will
take advantage of opportunities amid the EM carnage, as analysts
continue to see EM as the area that's most vulnerable to a re-pricing
in USD.
* *
*
The
European Union is mired in an existential crisis. For the past
decade, everything that could go wrong has gone wrong. How did a
political project that has underpinned Europe’s postwar peace and
prosperity arrive at this point?
In
my youth, a small band of visionaries led by Jean Monnet transformed
the European Coal and Steel Community first into the European Common
Market and then the EU. People of my generation were enthusiastic
supporters of the process.
I
personally regarded the EU as the embodiment of the idea of the open
society. It was a voluntary association of equal states that banded
together and sacrificed part of their sovereignty for the common
good. The idea of Europe as an open society continues to inspire me.
But
since the financial crisis of 2008, the EU seems to have lost its
way. It adopted a program of fiscal retrenchment, which led to the
euro crisis and transformed the eurozone into a relationship between
creditors and debtors. The creditors set the conditions that the
debtors had to meet, yet could not meet. This created a relationship
that was neither voluntary nor equal – the very opposite of the
credo on which the EU was based.
As
a result, many young people today regard the EU as an enemy that has
deprived them of jobs and a secure and promising future. Populist
politicians exploited the resentments and formed anti-European
parties and movements.
Then
came the refugee influx of 2015. At first, most people sympathized
with the plight of refugees fleeing political repression or civil
war, but they didn’t want their everyday lives disrupted by a
breakdown in social services. And soon they became disillusioned by
the failure of the authorities to cope with the crisis.
When
that happened in Germany, the far-right Alternative für Deutschland
(AfD) rapidly gained strength, making it the country’s largest
opposition party. Italy has suffered from a similar experience
recently, and the political repercussions have been even more
disastrous: the anti-European Five Star Movement and League parties
almost took over the government. The situation has been deteriorating
ever since. Italy now faces elections in the midst of political
chaos.
Indeed,
the whole of Europe has been disrupted by the refugee crisis.
Unscrupulous leaders have exploited it even in countries that have
accepted hardly any refugees. In Hungary, Prime Minister Viktor Orbán
based his reelection campaign on falsely accusing me of planning to
flood Europe, Hungary included, with Muslim refugees.
Orbán
is now posing as the defender of his version of a Christian Europe,
one that challenges the values on which the EU was based. He is
trying to take over the leadership of the Christian Democratic
parties which form the majority in the European Parliament.
The
United States, for its part, has exacerbated the EU’s problems. By
unilaterally withdrawing from the 2015 Iran nuclear deal, President
Donald Trump has effectively destroyed the transatlantic alliance.
This has put additional pressure on an already beleaguered Europe. It
is no longer a figure of speech to say that Europe is in existential
danger; it is the harsh reality.
What
Can Be Done?
The
EU faces three pressing problems: the refugee crisis; the austerity
policy that has hindered Europe’s economic development; and
territorial disintegration, as exemplified by Brexit. Bringing the
refugee crisis under control may be the best place to start.
I
have always advocated that the allocation of refugees within Europe
should be entirely voluntary. Member states should not be forced to
accept refugees they don’t want, and refugees should not be forced
to settle in countries where they don’t want to go.
This
fundamental principle ought to guide Europe’s migration policy.
Europe must also urgently reform the Dublin Regulation, which has put
an unfair burden on Italy and other Mediterranean countries, with
disastrous political consequences.
The
EU must protect its external borders but keep them open for lawful
migrants. Member states, in turn, must not close their internal
borders. The idea of a “fortress Europe” closed to political
refugees and economic migrants not only violates European and
international law; it is also totally unrealistic.
Europe
wants to extend a helping hand toward Africa and other parts of the
developing world by offering substantial assistance to democratically
inclined regimes. This is the right approach, as it would enable
these governments to provide education and employment to their
citizens, who would then be less likely to make the often dangerous
journey to Europe.
By
strengthening democratic regimes in the developing world, such an
EU-led “Marshall Plan for Africa” would also help to reduce the
number of political refugees. European countries could then accept
migrants from these and other countries to meet their economic needs
through an orderly process. In this way, migration would be voluntary
both on the part of the migrants and the receiving states.
Present-day
reality, however, falls substantially short of this ideal. First, and
most importantly, the EU still lacks a unified migration policy. Each
member state has its own policy, which is often at odds with the
interests of other states.
Second,
the main objective of most European countries is not to foster
democratic development in Africa and elsewhere, but to stem the flow
of migrants. This diverts a large part of the available funds to
dirty deals with dictators, bribing them to prevent migrants from
passing through their territory or to use repressive methods to
prevent their citizens from leaving. In the long run, this will
generate more political refugees.
Third,
there is a woeful shortage of financial resources. A meaningful
Marshall Plan for Africa would require at least €30 billion ($35.4
billion) annually for a number of years. EU member states could
contribute only a small fraction of this amount. So, where could the
money come from?
It
is important to recognize that the refugee crisis is a European
problem requiring a European solution. The EU has a high credit
rating, and its borrowing capacity is largely unused. When should
that capacity be put to use if not in an existential crisis?
Historically, national debt always grew in times of war. Admittedly,
adding to the national debt runs counter to the prevailing orthodoxy
that advocates austerity; but austerity is itself a contributing
factor to the crisis in which Europe finds itself.
Until
recently, it could have been argued that austerity is working: the
European economy is slowly improving, and Europe must simply
persevere. But, looking ahead, Europe now faces the collapse of the
Iran nuclear deal and the destruction of the transatlantic alliance,
which is bound to have a negative effect on its economy and cause
other dislocations.
The
strength of the dollar is already precipitating a flight from
emerging-market currencies. We may be heading for another major
financial crisis. The economic stimulus of a Marshall Plan for Africa
and other parts of the developing world should kick in just at the
right time. That is what has led me to put forward an out-of-the-box
proposal for financing it.
Without
going into the details, I want to point out that the proposal
contains an ingenious device, a special-purpose vehicle, that would
enable the EU to tap financial markets at a very advantageous rate
without incurring a direct obligation for itself or for its member
states; it also offers considerable accounting benefits.
Moreover,
although it is an innovative idea, it has already been used
successfully in other contexts, namely general-revenue municipal
bonds in the US and so-called surge funding to combat infectious
diseases.
But
my main point is that Europe needs to do something drastic in order
to survive its existential crisis. Simply put, the EU needs to
reinvent itself.
This
initiative needs to be a genuinely grassroots effort. The
transformation of the Coal and Steel Community into the European
Union was a top-down initiative and it worked wonders. But times have
changed. Ordinary people feel excluded and ignored. Now we need a
collaborative effort that combines the top-down approach of the
European institutions with the bottom-up initiatives that are
necessary to engage the electorate.
Of
the three pressing problems, I have addressed two. That leaves
territorial disintegration, exemplified by Brexit. It is an immensely
damaging process, harmful to both sides. But a lose-lose proposition
could be converted into a win-win situation.
Divorce
will be a long process, probably taking more than five years – a
seeming eternity in politics, especially in revolutionary times like
the present. Ultimately, it is up to the British people to decide
what they want to do, but it would be better if they came to a
decision sooner rather than later. That is the goal of an initiative
called Best for Britain, which I support. This initiative fought for,
and helped to win, a meaningful parliamentary vote on a measure that
includes the option of not leaving before Brexit is finalized.
Britain
would render Europe a great service by rescinding Brexit and not
creating a hard-to-fill hole in the European budget. But its citizens
must express support by a convincing margin in order to be taken
seriously by Europe. That is Best for Britain’s aim in engaging the
electorate.
The
economic case for remaining an EU member is strong, but it has become
clear only in the last few months, and it will take time to sink in.
During that time, the EU needs to transform itself into an
organization that countries like Britain would want to join, in order
to strengthen the political case.
Such
a Europe would differ from the current arrangements in two key
respects.
First, it would clearly distinguish between the EU and the
eurozone. Second, it would recognize that the euro has many unsolved
problems, which must not be allowed to destroy the European project.
The
eurozone is governed by outdated treaties that assert that all EU
member states are expected to adopt the euro if and when they
qualify. This has created an absurd situation where countries like
Sweden, Poland, and the Czech Republic, which have made it clear that
they have no intention to join, are still described and treated as
“pre-ins.”
The
effect is not purely cosmetic. The existing framework has converted
the EU into an organization in which the eurozone constitutes the
inner core, with the other members relegated to an inferior position.
There is a hidden assumption at work here, namely that, while various
member states may be moving at different speeds, they are all heading
to the same destination. This ignores the reality that a number of EU
member countries have explicitly rejected the EU’s goal of “ever
closer union.”
This
goal should be abandoned. Instead of a multi-speed Europe, the goal
should be a “multi-track Europe” that allows member states a
wider variety of choices. This would have a far-reaching beneficial
effect. Currently, attitudes toward cooperation are negative: member
states want to reassert their sovereignty rather than surrender more
of it. But if cooperation produced positive results, sentiment might
improve, and some objectives, like defense, that are currently best
pursued by coalitions of the willing might attract universal
participation.
Harsh
reality may force member states to set aside their national interests
in the interest of preserving the EU. That is what French President
Emmanuel Macron urged in the speech he delivered in Aachen when he
received the Charlemagne Prize, and his proposal was cautiously
endorsed by German Chancellor Angela Merkel, who is painfully aware
of the opposition she faces at home. If Macron and Merkel succeeded,
despite all the obstacles, they would follow in the footsteps of
Monnet and his small band of visionaries. But that narrow group needs
to be replaced by a large upsurge of bottom-up pro-European
initiatives. I and my network of Open Society Foundations will do
everything we can to help those initiatives.
Fortunately,
Macron, at least, is well aware of the need to broaden popular
support for and participation in European reform, as his proposal for
“Citizens’ Consultations” makes clear. The Trento Economic
Festival, a large gathering organized by civil-society groups at a
time when Italy did not have a government, will meet from May 31 to
June 3. I hope it will be successful and set a good example for
similar civil-society initiatives to emulate.
European
Implosion Sends Panic Through Global Markets As George Soros Warns
‘We May Be Heading For Another Major Financial Crisis’
29
May, 2018
I
told
you to
keep your eyes on Europe. On Tuesday, widespread panic shot
through European financial markets and this deeply affected U.S.
markets as well. The Dow Jones industrial average fell 391
points, and at this point the Dow and the S&P 500 have been down
for three trading sessions in a row. But the big news is what
is happening over in Europe. Tuesday’s crash represented the
largest one day move for 2 year Italian bonds ever,
and Italian bank stocks are now down a
whopping 24 percent from
their April highs. Overall, European banks have fallen a total
of 11
percent over
the last four days, and it isn’t just banks in troubled countries
such as Italy and Spain that are hurting. The biggest bank in
Europe, Deutsche Bank, just keeps on tumbling and is now just barely
above all-time lows. A few days ago when I wrote that the next
global economic crisis “could
be just around the corner”,
there were some people that criticized me for making such a
statement. Well, as you will see below, now this fact has
become so obvious that even George Soros is saying it.
Those
that are ignoring what is going on in Italy are making a tragic
mistake. Italy is the third largest economy in the eurozone,
and even the
Wall Street Journal is
admitting that its bond market is “in meltdown”…
Risk
aversion is back. Italy is the focal point, with
its bond market in meltdown,
its politics in crisis after President Sergio Mattarella blocked
the formation of an antiestablishment government,
and its credit rating under threat.
That
is all now making bigger waves: Europe’s deepening troubles and
disappointing global growth signals are sparking a sudden rally
in haven
bonds like U.S. Treasurys.
The
next financial crisis has already arrived in Europe, and the primary
reason for this crisis has to do with the giant mess that Italy’s
government has become. The following summary of the current
situation comes from CNBC…
Italy
has been without a government since an inconclusive vote in early
March, with anti-establishment political groups abandoning their
efforts to form a coalition over the weekend amid a dispute with the
country’s head of state.
President
Sergio Mattarella, who was installed by a previous pro-EU government,
refused to accept the nomination of euroskeptic candidate Paolo
Savona for economy minister on Sunday.
Instead,
he set the country on a path to another snap vote by appointing
former International
Monetary Fund (IMF) official
Carlo Cottarelli as interim prime minister.
Of
course the Italian parliament will never accept Cottarelli, and it
looks like we are heading for snap elections in either July or
August.
What
is at stake in these elections is of the utmost importance to all of
Europe. As Politico recently
discussed, if the Italian people continue to move toward
anti-establishment parties we could actually see Italy leave the euro
or even leave the EU altogether…
Italy,
the third-largest EU power once Britain leaves, may sooner or later
be run by two parties who agree on little other than their apparent
eagerness to break stuff. It could be Italy’s debt — a default in
the trillions of euros. It could be the euro, if they follow through
on past promises to hold a referendum on membership in the single
currency. And what’s ultimately broken could be the EU as we know
it, if any such referendum goes against Brussels, as most that have
been held have done.
The
EU survived Brexit, but there is a lot of doubt as to whether it
could also survive a defection by Italy.
During
a speech on Tuesday, George Soros soberly assessed the current state
of affairs in Europe. According to Bloomberg,
at one point he stated that “we
may be heading for another major financial crisis.”
The
stark warning from the billionaire money manager comes as Italian
bond yields have jumped to multi-year highs and major emerging
economies including Turkey and Argentina are struggling to contain
the fallout from runaway inflation. Soros, who has been the object of
ire by the government of his native Hungary, saved his gloomiest
outlook for the EU.
“Everything
that could go wrong has gone wrong,” he
said, citing the refugee crisis and austerity policies that
catapulted populists into power, as well as “territorial
disintegration” exemplified by Brexit. “It
is no longer a figure of speech to say that Europe is in existential
danger; it is the harsh reality,” he
said.
I
must admit that I agree with his assessment of the situation in
Europe. The EU most definitely is in “existential danger”,
and I believe that we are in the beginning stages of the worst
financial crisis in modern European history.
So
what should be expect to see in the weeks head?
Well,
here are three things to keep an eye on…
#1
The chaos is likely to continue for Italian financial markets.
#2
The euro is likely to continue to fall relative to the U.S. dollar.
#3
Trouble signs are likely to continue to erupt at European banking
giants such as Deutsche Bank.
I
have been warning about Italy, the euro and Deutsche Bank for a very
long time, but because things didn’t fall apart right away a lot of
people thought that the problems had been solved.
But
just because something doesn’t happen in the short-term doesn’t
mean that it isn’t going to happen. The long-term trends that
are destroying Europe’s financial system took a long time to
mature, and we could all see what was happening, but now we have
finally reached a major crisis point.
Of
course the European elite could try to “extend and pretend” by
pulling a few more tricks out of their sleeves, but at some point
even they will lose control. There is only so much that can be
done, and those holding the reigns of power in Europe are almost out
of ammunition.
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