Avoiding a Bleak Future for the Euro

In a recent piece in the Financial Times,
George Soros makes the case that, to avoid a bleak future for the euro
and the European Union in general, Europe should take steps to
recapitalize banks before bailing out member states. In the piece, Soros
discusses issues that INET is very interested in exploring further,
such as the idea that flaws in macroeconomic theory helped lead to the
financial crisis of 2008.

Two of the big problems becoming apparent in Europe, Soros notes, is that when the euro was introduced, there was not a common treasury; and that the architects of the euro did not realize that imbalances could form in the private sphere as well as the public sector.

Soros says that the flaws are being addressed, but even the methods used to address the flaws could be problematic and ultimately profound:

“The lack of a common treasury is now being remedied: first came the Greek rescue package, then a temporary emergency facility. The financial authorities are a little bit pregnant and it is virtually certain that some permanent institution will be set up. Unfortunately, it is equally certain that the new arrangements will also be flawed. For the euro suffers from other shortcomings. Policymakers are confronted not only by a currency crisis but also by a banking crisis and a crisis in macroeconomic theory.”

The effects of these mistakes could be severe, according to Soros:

“Resentment between creditors and debtors is liable to grow and there is a real danger that the euro may destroy the political and social cohesion of the EU.”

The failure of policymakers (and ultimately the macroeconomic theories they relied upon) to anticipate the global financial crisis is something that INET would like to see better addressed. To do this, it is imperative that new thinking analyzes past crises differently, with more than just the basic macroeconomic framework that the discipline has relied on over the past few decades.