Market Overview

Soros: The Euro Will Survive, But Need ESM and Deposit Insurance

On June 2, 2012, George Soros addressed the assembly at the Festival of Economics in Trento, Italy. Soros spoke about the failures of economic theory, and outlined a three month time-limit on the euro crisis and a solution to fix it.

George Soros said, “I believe that the failure is more profound than generally recognized. It goes back to the foundations of economic theory. Economics tried to model itself on Newtonian physics. It sought to establish universally and timelessly valid laws governing reality. But economics is a social science and there is a fundamental difference between the natural and social sciences.”

However, social sciences are not always based on pure fact. A social science is open to interpretation or failure because it has a human element or as George Soros said, “an engaged decision maker.”

These decision makers bring imperfect knowledge into the equation. The theories of perfect competition, efficient market hypothesis and the theory of rational expectations only work up until a point and are still subject to change and experimentation.

According to George Soros, “Together [fallibility and reflexivity], they ensure both a divergence between the participants' view of reality and the actual state of affairs and a divergence between the participants' expectations and the actual outcome.” This statement is significant because it helps explain where the theories fail and how the financial bubbles emerge.

George Soros states that, “[According to my theory,] financial bubbles are not a purely psychological phenomenon. They have two components: a trend that prevails in reality and a misinterpretation of that trend…booms develop slowly but the bust tends to be sudden and devastating.”

He continues in his speech to use the euro crisis and the subprime crisis of 2008 to illustrate his theories which up until the 2008 crash as he states, “have been mostly ignored.”

He finishes with a call to action, “We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it,” it shows what he believes is the root of the euro crisis. He believes that the core countries need to fall in line and take responsibility. The countries need to follow through on the treaties and cooperate in the gradual reordering of the financial system.

What does this mean for traders and investors worldwide? The euro will survive not just because the future or Europe depends on it, but because it is pushing the core countries economy forward. If the EU breaks up then the core countries will have a financial crisis, and lose out on the economic growth that the EU provided.

The solution in George Soros' own words, “Banks need a European deposit insurance scheme in order to stem the capital flight. They also need direct financing by the European Stability Mechanism (ESM) which has to go hand-in-hand with eurozone-wide supervision and regulation. The heavily indebted countries need relief on their financing costs. There are various ways to provide it but they all need the active support of the Bundesbank and the German government.”

For the full speech: Go here (It is currently not available)

Posted-In: News Hedge Funds Movers & Shakers Politics Psychology Forex Global Economics Best of Benzinga

 

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