Soros Questions the Euro’s Future

In an editorial penned for the Financial Times, billionaire investing icon George Soros said that while Greece could be salvaged by a makeshift financial-rescue package, bigger problems lie ahead for the euro.

According to weekend news reports, Germany’s finance ministry has sketched out a plan under which countries using the euro currency will provide between $27 billion and $33.7 billion (20 billion and 25 billion euros) in aid for Greece, which is teetering on the brink of default.

Soros says that “a makeshift assistance should be enough for Greece,” but warns that the growing threats posed by other debt-laden, euro-member countries – particularly Spain, Italy, Portugal and Ireland – could prove overwhelming.

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“Together they constitute too large of a portion of euroland to be helped in this way,” Soros said. “The survival of Greece would still leave the future of the euro in question. Even if it handles the current crisis, what about the next one?”

This isn’t the first time during the ongoing financial crisis that the situation was slated to worsen before it improved. Almost exactly one year ago, while speaking at a Columbia University dinner, Soros warned – correctly — that the world financial system had effectively disintegrated, meaning the end of the economic misery was nowhere in sight.

In fact, Soros actually compared the financial crisis to the breakup of the Soviet Union, and said that the whipsaw effects of the crisis would prove to be more severe than the Great Depression.

“We witnessed the collapse of the financial system,” Soros told the audience during his February 2009 speech. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”

Soros cemented his reputation as an investing icon with The Quantum Fund, a hedge fund that’s often described as the first real global investment fund, which he and Jim Rogers founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.

Gloom in Greece

Greece’s deficit swelled to 12.7% of gross domestic product (GDP) in 2009, way above the European Union’s 3% cap. Greece’s government leaders have pledged to reduce that nation’s budget deficit to 8.7% in 2010, but that goal won’t be easily met.

Flights were grounded and schools shuttered across Greece yesterday (Wednesday), as civil servants and private-sector workers went on a nationwide strike to protest EU-backed austerity measures. Police employed tear gas to quell uprisings involving 15,000-25,000 protestors in Athens, The FT reported.

According to Soros, the rescue plan for Greece has a key weakness: The euro is fundamentally flawed because there is no Treasury agency backing it.

“When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency,” he said. “This is a well-known fact that should have been clear to everyone involved in the creation of the euro.”

For that reason a well-organized eurobond market is desirable – as are more-intrusive monitoring and institutional arrangements for conditional assistance, Soros said.

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