Culture & ideas Ideas

End of the line for the euro 3/4: Wall Street's harsh judgment

16 August 2011
Le Monde Paris

Le Monde's fictional series about the demise of the single currency continues. Gathered around guru George Soros and the former European commissioner Mario Monti, the leading lights of international finance consider the critical situation of the euro, which has been brought about by the ineptitude of European leaders. Excerpts.

In the old-fashioned hush of one of the Upper East Side hotel’s exclusive conference rooms, discreet lighting highlighted the soft folds of scalloped curtains and the gold coloured velvet of Empire chairs. It was a fitting venue for these regular meetings, convened by an influential New York moneyman, which regularly attracted high-level diplomats along with top-ranked luminaries from the world of finance.

Tonight’s discussions would be led by John Paulson and George Soros, who sat opposite each other at the centre of the table. Paulson’s empire managed 37 billion dollars, while Soros controlled 28 billion. They were also joined by the head of Blackstone, Stephen Schwarzman, who reigned over 100 billion dollars in assets. In Wall Street, more than anywhere else, wealth is always a relative concept. 

Along with the moneymen, a handful of ambassadors and other high profile political figures had come to listen to the two oracles discuss Europe, which, in May 2012, was providing ever-greater cause for international concern. Among them was the former European Commissioner and Goldman Sachs adviser, Mario Monti, who was enthusiastically awaiting the start of the debate at his first ‘ideas dinner’. He had assumed the role of the most eminent European representative in the wake of the death of his compatriot, the much-mourned Tommaso Padoa-Schioppa.

Over the last 24 hours, the rumour of a CDU-FDP alliance against Angela Merkel had continued to grow. Having begun on 25 May with a sensational article on Spiegel Online entitled "Pact seals the fate of the euro," it had spread like wildfire from the website of the Hamburg weekly to the mainstream press, which was now reporting that the chancellor would soon be in a minority in the Bundestag and that early general elections were on the cards for the end of 2012. 

This speculation was based on a much more soberly written document – "Proposal for a coalition contract" – which had also been made available by the website. In two pages, without a letterhead, the purported white paper outlined the main tenets of an agreement between the Christian Democrats and the liberals, in which both parties commited to an "ordered exit" from the eurozone by January 1, 2014. All of the information in the article was based on anonymous sources, with the exception of the chairman of the majority group in the Bundestag, Volker Kauder, who had boldly come out to denounce "irresponsible speculation." If it succeeded in spooking investors, which was the likely outcome, the Spiegel scoop could block Spain’s and even Italy’s access to financial markets at a time when the German constitutional deadlock had cast a doubt over the viability of the stability mechanism. Europe was, once again, standing on the brink.

It was time to begin the debate.“It is tragic to see how Europe and in particular Germany has failed to learn from the lessons of the Great Depression," said Soros. "Insisting that the burden of adjustment be born by the indebted countries is sheer madness. We are forcing them into a depression: literally hounding them into it. But, quite frankly, I do not believe in this story of a voluntary German exit from the euro, which has been put about in the press. Most Germans are wrong in their analysis of the crisis, but most of them are not suicidal.

"George, in what you say, you seem to be more focused on the risks posed by the end of the single currency, and less preoccupied by the risks posed by consolidation of the eurozone."

"As it stands, we are faced with a real paradox. In spite of the tragic turn of events, both of the alternative outcomes are very still very possible. Institutions have taken some very important steps, and there is now a genuine basis for further progress. In the wake of the constitutional court ruling, the decision to create the "Kirchberg Club" was a real masterstroke. There is no denying that what the European Central Bank has done amounts to a revolution. At the same time, all the initiatives that have been taken since 2010 are moving towards a European treasury, which is something I have always advocated. And I have not done so alone. In April 2010, Dominique Strauss-Kahn was booed when he proposed this idea to an audience at King's College. And Jean-Claude Trichet met with a similar response last year. But the idea continues to take hold. The massive mutualisation of Eurozone debt under a federal fiscal authority is the only route towards a positive outcome."

"Thank you, George. I don’t know if we should view your position as optimistic or pessimistic. Mario, how would you respond to this?"

"I would like to say that I not only share but that I am also an ardent supporter of the view expressed by George: the situation is serious, but it is not completely hopeless. With regard to the issue of a European treasury, which is a key point in this debate, I believe we are faced with a dilemma. On the one hand, we have the Bundestag which wants the European treasury to answer to its authority, and on the other, we have the the European Parliament, which has pointed out – and this is also an equally valid argument – that the national ministers of finance should demonstrate that a common treasury will be in the interests of Europe to MEPs. So we have to contend with two interconnected constitutional and institutional headaches. To be honest, it will not be easy to find a solution."

"You will need a political genius to resolve the problem."

"If you know one, tell him he is most welcome in Brussels. Joking apart, I don't want to appear to be making light of the seriousness of this situation. Europe needs a liquidity balloon... "

At this point he leveled his gaze on the Russian and Chinese representatives at the table.

"Nothing less than a liquidity balloon. And you can be certain that the common market will not survive the end of the euro, because if it happens, Germany, which will be held to ransom by the re-evaluation of its currency, will come under enormous pressure to dismantle all kinds of single market regulations to remain competitive. And if you take away the single currency and the single market from the European Union, you won’t have very much left. For the rest of the world, this would ultimately mean an end to multilateralism. So the question is: who wants a world that is solely based on bilateral relations? Believe me, no one does."

Then turning to Paulson, the host asked: "Do you favour the hypothesis of a crash in Europe?

"I don’t know about a crash. You can never predict a crash," said Paulson with a smile. “But I think a brutal adjustment is likely. "

To be continued ...