Eurozone flawed, austerity an imbalance, not solution: Soros

The eurozone still has flaws and while austerity may be beneficial for a while, it is not a long-term solution, said investment guru and chairman of Soros Fund Management, George Soros, at a meet at the Indian School of Business in Hyderabad today.

Soros said that when the euro was introduced, the European Central bank accepted government bonds of all countries on equal terms, at a discount window. But that created an economic imbalance in stronger countries, like Germany, which had to introduce reforms to offset that.

“The convergence of interest rates led to the divergence of competitiveness,” Soros said.

“There were certain inadequacies when the euro was set up and the authors knew it. It was a currency union without a political union. There were also flaws which the authors were not aware of and many are still not fully recognised,” he said, adding, these flaws are causing the problems.

[caption id=“attachment_173153” align=“alignleft” width=“380” caption=“Billionaire investor George Soros has said there may be no clear solution to the eurozone crisis. Reuters”] [/caption]

However, he said that long-term austerity may not be the solution to the problem. In fact, he said, there may be no clear solution to the eurozone crisis “with everything up in the air”.

In the near term one has to impose the austerity measures because there is an imbalance between the debtor and the creditor countries," said Soros but, “Austerity to my mind is a trap. It’s an imbalance that can occur in the financial markets and could be a replay of the Great depression, in a different context”.

Citing the crisis as being “more serious and more threatening for the global economy than the 2008 recession”, Soros said the euro has the potential of endangering the political cohesion of the European Union, reasoning that, “If the common currency broke down it would lead to the break up of the EU. And that’s what makes it so severe.”