The Bundesbank is campaigning against the “indefinite expansion” of money supply and taking steps to limit the losses it would face if the euro splintered, Soros said in a speech in Berlin today.
“This is creating a self-fulfilling prophecy,” he said. “Once the Bundesbank starts guarding against a breakup everybody will have to do the same. Markets are beginning to reflect this.”
As the debt crisis stretches into a third year, Bundesbank President Jens Weidmann has begun warning that the European Central Bank’s emergency liquidity measures “create risks and have to be unwound” after the ECB balance sheet ballooned by about 30 percent since November.
If the ECB continued offering support for a few more years then a “break-up of the euro would become possible without a meltdown,” Soros said.
“The omelette could be unscrambled, but it would leave the central banks of the creditor countries with large claims against the central banks of the debtor countries which would be difficult to collect,” he said.
Soros also said Europe’s so-called fiscal compact “cannot possibly work” because highly indebted nations will either choose not to meet its tougher fiscal rules or by doing so trigger collapsing demand.
“Either way, debt ratios will rise and the competitiveness gap with Germany will widen,” he said. “Whether or not the euro endures, Europe is facing a long period of economic stagnation or worse.”
The resulting “deflationary debt trap” will threaten the existence of the European Union, he said,
Soros is best known for making $1 billion in 1992 betting the U.K. would be forced to devalue the pound. Soros Fund Management LLC decided in July to return outside capital and focus on running assets for Soros and his family, who made up the bulk of its then $25.5 billion assets, to avoid having to register with the Securities and Exchange Commission by last month.
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