Soros lectures Germany
George Soros has been making what he calls a "grave accusation" against Germany. The financier-philanthropist said last week that Germany is endangering the European Union by keeping wages down and pursuing a balanced national budget too aggressively. Germany's parsimonious attitude, Soros suggests, may bring down the euro.
In a speech at Humboldt University, Soros said that Germany should spend more and advocate aggressive spending and looser money by the European Investment Bank and the European Central Bank, respectively.
Soros implied that Germany should look to the U.S., where President Barack Obama has spent vigorously and Federal Reserve Chairman Ben Bernanke has created money for the greater good. Soros underscored that Germany clearly "does not know what it is doing."
But it is Soros who is endangering the euro by advocating these spending and loosening policies. They are policies that may give Europe budget problems that render its currency vulnerable to attack by Soros-like traders.
Europe unified its monetary policy through the euro before it unified politically, therefore sustaining member countries' abilities to pursue the kind of independent fiscal policies that can strain a joint currency. Soros labels this construct "patently flawed."
Clever is another way to describe it. Access to the euro-land market incentivizes nations to apply fiscal discipline to themselves. Countries that don't will face tax increases and budget cuts to curtail debt or will be forced out of the monetary union.
That happened to the U.K. in the 1990s, when Soros cost the country $3 billion while he made $1 billion by forcing Britain out of the European Exchange Rate Mechanism, the euro precursor. Germans recall what happened when Soros' raiders hit the U.K., so they know how brutally any non-dollar currency can be brought down.
Then there is the German memory of the 1920s hyperinflation, which resulted from the decision of a desperate Weimar Republic to inflate its way out of war debts.
Pressure on Germany from Soros and the Obama administration makes it harder for German Chancellor Angela Merkel or other European leaders to heed their own sound instincts. Soros' pressure also obscures a desirable policy path for Germany in which it practices fiscal discipline and growth creation so well that other euro nations emulate it.
The Keynesian argument that the choice is between spending and pain is untrue. For one thing, deflation isn't always painful -- in the 1920s the U.S. thrived during deflation. Budget tightening, especially in combination with competitive tax codes, may put Europe on a growth path that renders its currency a competitor for the role of global leader.
Europe, like the U.S., isn't growing fast enough to continue spending its way out of every recession. It is likely that euro-spending on a big scale in 2010 or 2011 would render Europe's nations the very sort that vulnerable currency traders specialize in annihilating.
Soros wants to help the Obama administration and the Keynesian spending that Democrats favor. If Europe spends, that makes the U.S. look less isolated. A big spending Europe also makes the euro less of a threat to the dollar. In any case, it is hard to imagine that what Soros alleges about Germany is true for Soros: that he just doesn't understand what he is doing.
Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist.
