Germany’s push for European fiscal prudence amid tepid growth and sovereign-debt burdens is “liable to send the euro zone into a deflationary spiral,” billionaire investor George Soros said.
German leaders have insisted on fiscal austerity measures in the euro zone while continuing to cut their own deficits as exports have led to the fastest economic growth since reunification. German gross domestic product grew at 9 percent in the second quarter and unemployment has continued to fall.
In May, the European Union offered a 750 billion euro ($1 trillion) rescue fund for Greece and other peripheral members of the region to help address concerns about sovereign default. The loan package imposed budget rules on distressed euro-area members. Governments in Spain, Italy and Portugal have all pledged to step up deficit-cutting efforts.
However “deficit reduction by a creditor country such as Germany is in direct contradiction of the lessons learned from the Great Depression of the 1930s,” the 80-year-old Soros said in prepared remarks for a speech at Columbia University. When both creditor and debtor countries reduce their deficits amid high unemployment they “set in motion a deflationary spiral in debtor countries. It is liable to push Europe into a period of prolonged stagnation or worse.”
The European fiscal crisis and cleanup operation confirmed Germany’s preeminence in Europe, he said. It also made the German people even more hesitant to embark on expanded EU ventures as 53 percent regard the euro as a “bad thing,” according to a June poll by the German Marshall Fund of the U.S.
The 16-nation common currency has risen 14 percent against the dollar since touching a four-year low in June. Soros said success for the currency may be short-lived.
“Under duress, the euro has begun to remedy its main shortcoming, the lack of a common treasury,” Soros said. “But it is far too early to celebrate because the emerging common fiscal policy is dictated by Germany and Germany is wedded to a false doctrine of macro-economic stability, which recognizes only the threat of inflation and ignores the possibility of deflation.”
Soros said more government spending is needed in the U.S., in lieu of monetary stimulus, to sustain the country’s budding recovery and avoid chocking off growth.
“There are times like the present when we cannot count on the private sector to employ the available resources,” he said. “I do not believe that monetary policy can be successfully substituted for fiscal policy. Quantitative easing is more likely to stimulate corporations to devour each other than to create employment.”
Soros said President Barack Obama has failed to make a convincing case to congress and the American public about the need for more stimulus.
“There is real danger that the premature pursuit of fiscal rectitude may wreck the recovery.” he said. “This may be the right policy, but it comes at the wrong time.”
Soros gained fame in the 1990s when he reportedly made $1 billion correctly betting against the British pound. He also wagered that Germany’s mark would appreciate after the collapse of the Berlin Wall in 1989 and that Japanese stocks would start to fall in the same year.
Soros Fund Management LLC manages about $25 billion. Soros is no longer running the fund, he said in April.