SOROS WARNS EUROPE OF DISINTEGRATION / THE FINANCIAL TIMES ( RECOMMENDED READING )

Soros warns Europe of disintegration

By Gillian Tett and Chris Giles in Cambridge

Published: April 11 2010 15:23

The eurozone area and wider European Union is now “on the brink” of disintegration unless Germany steps up and provides loans at below-market rates to Greece, George Soros, the hedge fund manager, has warned.

However, Mr Soros added that he still hoped that Germany and others would be willing to forge a last-minute solution, since the consequence of a break-up would be so dangerous. He was speaking before an announcement on Sunday afternoon by eurozone finance ministers of the terms of a support package for Greece.

“It is 50-50 whether the eurozone breaks up. The damage that break up would cause is so great, that I think that as people realise it, they will pull back from the brink,” Soros told the Financial Times in an interview. “But we are at the brink now...a solution has to be found in a matter of days.”

Mr Soros’s comments on the fringes of a conference in Cambridge came as Dominique Strauss Kahn, the managing director of the International Monetary Fund spoke of the fiscal challenges facing all advanced economies and the need for a European Budgetary Authority to underpin the euro.

“The launching of the euro was only a first step. You can’t have a single currency without having a more coordinated economic policy,” Mr Strauss Kahn said.

Before any longer-term solution can be found, Mr Soros insisted Germany must step up to the plate. “Greece is willing to take the steps and has taken steps which are necessary to get through this crisis. Now Europe has to do its part to help Greece through,” he said.

“Unfortunately there are problems with Germany because it does not want to be the deep pockets helping out the profligate southerners which got into trouble. [But] if that is the case, the euro is in danger and the European union is in danger. I just hope that Germany will be helpful.”

Soros, who famously made around a $1bn profits almost two decades ago by betting on sterling’s exit from the Exchange Rate Mechanism, argued that “having a common currency was very sensible for a common market.” However, he stressed that Europe now faced a test. “Is there the political will to keep Europe together? If there is not I think that there will be a process of disintegration.”

He also argued that the IMF was now the only institution which could organise a solution. “The IMF is in the business of making emergency loans with conditions and that is what Greece needs. What Greece is doing is largely meeting the requirements of an IMF programme,” he said. “If Greece has to borrow at 6 or 7 per cent it cannot make the target.”

The IMF has already approved Greece’s fiscal consolidation plans as sufficient. Mr Strauss Kahn did not discuss the Fund’s attitude to Greece at the weekend conference, but he did say that the fiscal consolidation needed in most advanced economies was “formidable”.

“Reversing this increase [in public debt] will be a tremendous challenge—let alone reducing debt below pre-crisis levels, which may be needed to leave enough fiscal space to tackle future crises,” Mr Strauss Kahn said.

His speech was interrupted by a handful of protestors, complaining that the IMF was exacerbating global economic problems. “That was the old IMF – haven’t you read the press,” Mr Strauss Kahn replied to the protestors before they were ushered out of the Great Hall at King’s College, referring to the Fund’s role in championing fiscal stimulus and expansionary policies during this crisis.

Mr Soros said that he was no longer engaged in making active currency bets himself, since he retired from direct involvement in the Soros fund earlier this year and is now focusing on initiatives such as the launch of the Institute for New Economic Thinking, a think-tank which was launched in Cambridge this weekend.

However, he said that even if he was still trading in the markets, he would be extremely wary of placing big bets now, since the potential for a political backlash against “speculators” is ever higher now than it was in the aftermath of “Black Monday”, when sterling crumbled.

“Currency traders find it very difficult right now to speculate because public opinion is very much aroused. If I were running a hedge fund now I would be wary of making money because the political consequences would be too severe,” he said. “I don’t think that hedge funds are playing much of a role [in the current crisis] – it is not fertile ground. There is a kind of witch-hunt looking for someone who is profiting.”

Copyright The Financial Times Limited 2010.