June 25 (Bloomberg) — Billionaire investor George Soros speaks about Europe’s sovereign-debt crisis. Soros called on Europe to start a fund to buy Italian and Spanish bonds, warning that a failure by leaders meeting this week to produce drastic measures could spell the demise of the currency. He spoke yesterday with Bloomberg Television’s Francine Lacqua in London. (Source: Bloomberg)
Gavyn Davies of FT (one of the “six wise men” of the UK Treasury from the early 1990s) has a blog post on the redemption fund here Germany And The Redemption Fund.
He refers to the paper which provided the idea (click the link)
Is there an alternative which might be preferred both by Germany and by the peripheral countries? The leading candidate is the idea of a Eurozone Redemption Fund, which was first proposed last year by the German Council of Economic Experts. The prime attraction of this plan is that it emanates from Germany itself, and appears acceptable to the Constitutional Court, which is a sine qua non for any plan to fly.
A further attraction is that it has some of the features of eurobonds, at least in the short term, while also giving Germany better control over policy conditionality and collateral. Although Mrs Merkel is not exactly wild about the idea, it could be a fall-back position for her. And it has been under active consideration in this week’s discussions between France and the periphery.
My own understanding is that while the European Central Bank or the Eurosystem can set the whole yield curve in principle, it doesn’t have the political powers to do so and neither does it want to take risks of default by a Euro Area government. A Redemption Fund (sometimes called “fiscal authority” by people including Soros – bad terminology) is hence proposed. Hence Euro Area national governments will have their public debt absorbed by the markets and the redemption fund.
This has the advantage that nations’ governments do not face pressure in the markets but nonetheless, they have to follow rules – such as deficit of 3% and gradually reduce public debt to 60% over a period of 25 years.
While this is a great plan and takes powers from market forces, it leaves nations with a lower competitiveness to deflate demand over 25 years (or so) so that there is lower output and the aim of full employment is implicitly sacrificed. Also there is nothing in the plan which leads to a boom created by the private sector with private and external sector deficits. Perhaps the “imbalance procedure” will take care of this. At any rate, it is good for Europe in the short term and bad in the long term except if its entrepreneurs are much more successful in international markets compared to others resulting in the whole Euro Area running strong positive current balance of payments with the rest of the world while Europe pushes for more free trade via the WTO in the years ahead. And this injures all alike as Keynes would put it.
George Soros, however recognizes that there is a global problem (toward the end of the interview).
There is another problem in addition to that of competitiveness. A nation like Italy has a relatively better external sector than Spain. However Italians like to save a lot. A plan to reduce the public debt to 60% of gdp will hurt Italy even if Italy manages to improve its competitiveness.
Updated 25 June 2012, 7:25pm
Second Update 26 June 2012, 4:20am