Larry Elliott and Jill Treanor in Davos
guardian.co.uk, Wednesday 25 January 2012 21.16 GMT
George Soros says Europe did too little, too late, and Nouriel Roubini says Europe needs 'less austerity and more growth'
George Soros addresses World Economic Forum Link to this video
The euro fell sharply on the foreign exchanges today after the legendary speculator George Soros said that growing economic and political tensions could destroy the European Union.
A hard-hitting attack by the billionaire financier on the ineptitude of European policymakers was backed by warnings from other economists on the first day of the World Economic Forum in Davos about the fragility of the single currency.
"Unfortunately, the European authorities had little understanding of how financial markets really work, and did everything wrong." Greece, Soros added, was on the edge of a default that could push it out of the euro. "The odds are in that direction." Following his remarks, the euro lost a cent against the dollar, falling below $1.30.
Nouriel Roubini, one of the few economists to predict the global financial crisis, said: "The policy response is making the recession worse. What Europe needs is less austerity and more growth."
Ken Rogoff, a former chief economist at the International Monetary Fund, added to the pressure when he said the euro was a "halfway house that doesn't work".
Soros proposed that Spain and Italy should be allowed to finance their deficits by issuing treasury bills with a 1% interest rate, and warned that the current policies were leaving the weaker eurozone nations "relegated to the status of third world countries that became highly indebted in a foreign currency.
"The trouble is that the austerity that Germany wants to impose will push Europe into a deflationary debt spiral."
He added: "The fact that an unattainable target is being imposed creates a very dangerous political dynamic. Instead of bringing the member countries closer together, it will drive them to mutual recriminations. There is a real danger that the euro will undermine the political cohesion of the European economy."
Soros said the architects of the single currency had always known it was incomplete, and intended to buttress monetary union with political union. Defects had been ignored, he added, which set in motion a process of disintegration that made union more difficult to achieve today than when the euro was introduced.
"The Greek crisis revealed two defects in the Maastricht treaty [that established the single currency] which could prove fatal. First, that when member countries become heavily indebted they become like third-world countries that have borrowed too much in a foreign currency. Second, that there are no provisions for correcting errors in the euro's design. There is neither an enforcement mechanism nor an exit mechanism, and member countries cannot resort to printing money."
What was needed, Soros said, was a comprehensive solution backed by ample financial resources. "But Germany did not want to become the deep pocket for bad debtors. Consequently, Europe did too little too late, and the crisis snowballed."
Italy and Spain had been hit by contagion, Europe was in the grip of a credit crunch, and there was a risk of economic deterioration and political and social disintegration feeding on each other.
The European Union, he said, was "undemocratic to the point where the electorate is disaffected, and ungovernable to the point where it cannot deal with the crisis that it has created".
His point about the governments of Europe was echoed by Philip Jennings, head of UNI, the Swiss-based international trade union federation, who was concerned about workers being stripped of rights they were accustomed to. "Technocrat governments are playing with political gunpowder," Jennings told the forum. "The eurozone is going too far."
Salil Shetty, London-based secretary general of Amnesty International, also warned of the possibility of "explosions" among groups of people disillusioned with their falling living standards.
Jennings stressed his concern extended beyond the eurozone. In the US, for instance, just 6% of w orkers are covered by collective bargaining. "If you take away a worker's voice from the table, don't be surprised by the consequences," he said.
As the first day of Davos got under way yesterday Portugal's borrowing costs were on the rise, hitting a record high amid market fears that the bailed-out country will not be able to break free of its financial crisis in the near future. The yield on three-year debt reached 19.4%, on 10-year bonds it was 14.6%. The economy is forecast to contract by 3.1% this year.
