02/13/2012 12:59 PM

SPIEGEL Interview with George Soros

'Merkel Is Leading Europe in the Wrong Direction'

Global investor George Soros considers the German government's policies in the euro crisis to be disastrous. In a SPIEGEL interview, he warns of a vicious circle triggered by Chancellor Angela Merkel's strict austerity measures and pleads for more money to be pumped into the countries most plagued by the debt crisis.

SPIEGEL: German Chancellor Angela Merkel is praised globally as "Mrs. Europe" and at home she is more popular than ever in polls -- partly thanks to her strong refusal to constantly pledge more German money to the euro rescue effort. Why do you feel her policies are wrong?

Soros: I admire Chancellor Merkel for her leadership qualities, but she is leading Europe in the wrong direction. To solve the euro crisis, I advocate a two-phase policy -- which is first austerity and structural reforms as Germany implemented them in 2005, but then also a stimulus program. If you do not provide more stimulus in Europe, you will push many European countries into a deflationary debt spiral. And that would be extremely dangerous.

SPIEGEL: Are the new austerity guidelines for countries like Spain, Italy or Greece too tough?

Soros: They create a vicious circle. The deficit countries have to improve their competitive position vis-a-vis Germany, so they will have to cut their budget deficits and reduce wages. In a weak economy, profit margins will also be under pressure. This will reduce tax revenues and require further austerity measures, creating a vicious circle. Markets do not correct their own excesses. Either there is too much demand or too little. This is what the economist John Maynard Keynes explained to the world, except that he is not listened to by some people in Germany. But Keynes explained it very well -- when there is a deficiency of demand, you have to use public policy to stimulate the economy.

SPIEGEL: In the end, as the economically strongest country, Germany would have to carry the greatest burden of such programs. Many Germans no longer agree that should be done. Why should Germans now provide more money to the countries that have obviously cheated on the euro stability criteria?

Soros: This is a very righteous position taken by Berlin. But it is not exactly correct, because Germany was among the first countries to break the euro-zone rules.

SPIEGEL: Germany violated the three-percent limit for the budget deficit a few times, whereas Greece has systematically lied about its balance sheet. Are you really trying to compare the two?

Soros: The Germans were not exactly innocent. Everybody broke the Stability Pact rules, which means that there were not enough effective rule enforcement mechanisms in place.

SPIEGEL: Why do you think it is the right thing to pump even more money into the crisis countries?

Soros: Let's distinguish between Greece and the rest of the euro zone. Greece is a special case -- one in which everything that could have gone wrong did. The Greeks atrociously abused the advantages of European Union membership. When (former) Greek Prime Minister Georgios Papandreou was elected with a reform agenda and revealed the abuses of the previous government, he had to pay interest at penalty rates in order for Greece to be rescued. He did his best but it was not good enough and the political dynamics have been deteriorating ever since. Powerful business groups want to pay their tax arrears in drachmas, not in euros, and they own many newspapers. The rest of Europe behaved much better. Spain, for instance, ended the real estate boom with a lower debt ratio and also now has a better supervised banking system than Germany.

SPIEGEL: The German government has argued that it is only through high interest rates that the crisis states can be compelled to undertake tough reforms. If the euro states provide more aid, then interest rates sink and the pressure to reform subsides. What's wrong with that?

Soros: It is not the failures of Italian or Greek politicians that are currently the greatest problem, rather the high penal interest rates. The example of Greece demonstrated this. Germany has mishandled the rescue operation by providing the bailout at penal interest rates, which then led to an increase in the indebtedness of Greece. That is why today Greece is beyond rescue.

SPIEGEL: But it was the abundance of "cheap money" that was at the core of the last financial crisis. Would we not repeat the same mistake if we pledged billions of fresh money to countries in crisis?

Soros: I know it sounds as though we are repeating exactly the same mistake. But let's compare the situation on the global financial markets to a car that is skidding. When a car is skidding, you must first turn the wheel in the same direction as the skid. And only when you have regained control can you then correct the direction. We went through a 25-year boom in the global economy. Then came the crash in 2008. The financial markets actually collapsed, and they had to be put on artificial life support through massive state intervention. The euro crisis is a direct continuation or consequence of the 2008 crash. This crisis isn't over yet and we will have to spend more state money in order to stop the skidding. It is only afterward that we can change the direction. Otherwise we will repeat the mistakes that plunged America into the Great Depression in 1929. Angela Merkel simply doesn't understand that.

SPIEGEL: Through your funds, you have invested many billions in the financial markets. One could be forgiven for suspecting that the advice you give about the euro crisis might be based on your own interests.

Soros: Look, I can understand all the suspicions, and I think it is a legitimate question. However, I have made it a principle to give advice that does not serve my personal interest but rather the common interests. I think the record is clear on that point.

SPIEGEL: But you push for lower interest rates or access to "cheap money," for instance. Both steps would help you as an investor.

Soros: That is true. But it would also help all other investors and it would help to preserve the global financial system. In that sense, I am concerned about my own interests. But I am also retired and no longer actually manage the fund. Nevertheless, I think that I perhaps understand the financial system better than some of the people who are in charge. So, as a citizen, I feel justified in trying to give advice. I am not arguing for the policies I support to make a profit. I make it a principle in my advocacy to put the public good before my private interests.

'A Policy Failure on the Part of Europe'

SPIEGEL: Like many Americans, and the US government, you would like to see the euro get rescued by pouring more money into the problem. Why doesn't the US increase its contributions to the bailout through the International Monetary Fund?

Soros: There should be no need to have the IMF come in. It is only a policy failure on the part of Europe and particularly of Germany, because Germany is in charge. Europe as a whole is in external balance and should be able to solve its own internal problems.

SPIEGEL: You have repeatedly pushed for the introduction of euro bonds. German Finance Minister Wolfgang Schäuble responded by saying: Euro bonds give the wrong incentives because you "spend money you do not have to pay the bills of others."

Soros: People like Schäuble don't seem to understand that the heavily indebted countries are now at a severe disadvantage, because they have basically become heavily indebted in a foreign currency, the euro. They do not control it, and so they are in the same position as third world countries in Latin America were in at the beginning of the 1980s, where the countries became indebted in dollars. It was a situation that led to a lost decade there. Europe now faces a lost decade. That is the reason we need euro bonds and a new EU fiscal compact.

SPIEGEL: The EU has had a fiscal compact before, and the rules simply weren't followed. Why would the new fiscal pact be any different?

Soros: In the past, there was no enforcement mechanism. If you introduce euro bonds, the bulk of the financing would be on equal terms between Spain and Germany. But if the Spanish wanted to borrow additional amounts, they would have to be borrowed by Spain using the country's own credit, which would be extremely expensive because there would be a sharp penalty. Effectively, creating euro bonds would create the mechanism for controlling the amount of borrowing by each individual country.

SPIEGEL: But German politicians are hellbent on preventing euro bonds.

Soros: That is no longer true. Certainly, former German Finance Minister Peer Steinbrück used to say: "Euro bonds? No way." Today, Social Democratic Party heavyweight Frank-Walter Steinmeier says, like me, that what Chancellor Merkel is proposing in response to the euro crisis is necessary, but not sufficient.

SPIEGEL: Steinmeier is not in power.

Soros: The point I want to make is that opposition to euro bonds can no longer be described as the German position. It happens to be the position of this specific government at this moment in time.

SPIEGEL: What should happen with Greece?

Soros: Europe soon will need to pump further billions of dollars into Greece to prevent an immediate default. I expect that the money will be put up because Europe has not yet properly prepared for a Greek default. A disorderly default could cause so much harm that it may be better to pay the money now and allow a default to occur later.

SPIEGEL: Would a contagion effect in the rest of the euro zone be inevitable if Greece were to default now?

Soros: The governments of Italy and Spain can probably be ring-fenced because of the long-term refinancing operation (LTRO) that was provided by the European Central Bank. But I am worried about the banks and the bank deposits. If Greek depositors lose money, you may not be able to prevent a flight from Italian and Spanish banks -- which could lead to the ultimate breakup of the euro.

SPIEGEL: The US, always prone to dole out advice to Europeans, is not exactly in good shape either. The Occupy Wall Street movement has put the massive social inequality in America on the agenda. As a world famous investor with an estimated fortune of more than $22 billion dollars, what do you think of the movement?

Soros: I have sympathy with their anger, because they are victims. Financial investors in Wall Street investment banks got the benefit when the banks made a profit. But whenever they lost a lot of money, the state was forced to take over the losses. That was very unfair, and the people who carried the loss -- because they lost their jobs or had to pay more taxes -- have a very legitimate complaint.

SPIEGEL: Do you also support the idea, as demanded by the Occupy movement, that rich people like you should pay higher taxes?

Soros: I do. And I do not support the Republicans who want to save me from paying taxes.

SPIEGEL: What is your tax rate?

Soros: My effective tax rate is relatively low, but only because every year I contribute at least the maximum 50 percent of my income to my foundation.

SPIEGEL: If you support the idea of higher taxes, then why don't you just pay more taxes instead of giving the money to your foundation?

Soros: Because I think that my foundation uses the money better than the government does. In any event, I do pay taxes.

SPIEGEL: You are basically saying that you are smarter than the government.

Soros: Well, I have greater freedom of action than a bureaucracy. I also care more about the causes to which I contribute.

SPIEGEL: So how can you then turn around and tell other rich people that they should pay more taxes?

Soros: If every rich person gave 50 percent of their wealth to charity, I would not say they should pay more taxes.

SPIEGEL: You are a lifelong Democrat, but you recently said there is not much of a difference between the likely Republican presidential candidate, Mitt Romney, and Barack Obama. Did you mean that seriously?

Soros: Only a small part of my answer was quoted. There are a lot of differences between the people whom each would bring into the government and the kind of judges they would nominate. Even so, I neglected some important differences between them. For example, Obama would insist on higher taxes than Romney. That is why my fellow hedge fund owners support Romney and not Obama.

SPIEGEL: They also might like him because he proudly runs on his record as a businessman. In this time of social tensions, should a venture capitalist become the next US president?

Soros: Romney claims to know how to create jobs, but as a private equity investor he probably destroyed more jobs than he created because he wanted to maximize profits.

SPIEGEL: Are you going to fight Romney and support President Barack Obama with millions of dollars in donations as you did during his last campaign?

Soros: I do not intend to make contributions on that scale.

SPIEGEL: Are you disappointed with Obama?

Soros: Disillusioned is a better word. He is more of a follower than a leader -- much less so than Angela Merkel, for example. Unfortunately, she is leading Europe in the wrong direction. That is why I am trying to change her mind. I still believe Germans are open to arguments.

SPIEGEL: Mr. Soros, we thank you for this interview.

Interview conducted by Georg Mascolo, Gregor Peter Schmitz and Martin Hesse


Related SPIEGEL ONLINE links:

All Rights Reserved
Reproduction only allowed with the permission of SPIEGELnet GmbH