The European Union faces a breakdown within a decade if it fails to reverse a faltering economy, according to billionaire investor George Soros.
“Many nations have lived through stagnation and nations have always survived,” Soros said in comments at the end of a panel discussion at the Global Economic Symposium in Kiel, Germany. “However, the EU is not a nation, it is an association that is in formation and will not survive a decade or more of stagnation, so we are facing an eventual breakdown of the European Union.”
The 17-nation euro zone is only just coming out of a record 18-month recession as new political and financial risks emerge. German Chancellor Angela Merkel faces months of talks to set up a government, Italian Prime Minister Enrico Letta confronts a possible confidence vote this week and the U.S. government today began its first partial shutdown in 17 years.
While the fact that the rules governing the euro weren’t a topic during Germany’s general elections last month showed that the euro crisis is over, “Europe is far from a equilibrium situation, ” he said.
The euro crisis transformed the European Union into an association of “creditors and debtors that is by its nature compulsory and unequal,” Soros said, adding that has the potential of destroying the EU altogether.
“Only the creditors are in a position to prevent this outcome but they do not seem to show any inclination to do so,” he said. Germany, which he said “emerged as a de-facto hegemonic power” in Europe, should identify and correct the mistakes and misconceptions that have created the euro crisis.
“Germany can initiate the process because, as the country with the highest credit standing, it is in the driver’s seat,” he said. “If a debtor country tried to do it would merely aggravate its own position.”
Soros at a panel earlier today reiterated support for euro bonds to fight Europe’s sovereign crisis, saying joint debt liability would lower the cost of borrowing for individual euro member states.
“We need both, euro bonds and structural reform in individual countries,” said Soros.
Merkel, whose Christian Democratic bloc last month recorded its best election result in 23 years, repeatedly rejected the notion of debt mutualization in the euro area, arguing that this would create the wrong incentives for debt-laden states and damp their appetite for economic-policy changes.
“Euro bonds are a powerful taboo,” said Soros. A guarantee to borrow at a fixed euro-bond rate would reduce the need to transfer aid to debt-laden southern European states because the guarantee would never be called, he said.
“The danger of default would disappear,” he said. “That’s the free lunch you don’t have” at the moment. Transfer payments create “a disequilibrium” that is “unacceptable in the long term,” he said.
Soros, who has been one of the most outspoken critics of Germany’s austerity policies for the euro area, made $1 billion betting against the British pound in 1992.