Interview with George Soros given to De Telegraaf
How long
will the damage of the coronavirus last on the eurozone economy?
Longer than most people think. One of the
problems is that the virus itself is rapidly evolving and changing the way it
attacks human organs. This will make it much harder to develop a reliable
vaccine.
You advocate the issuance of perpetual bonds.
Why would this be a better solution than corona bonds? And what are the risks
of issuing perpetual bonds?
The European public and their political leaders
are not familiar with perpetual bonds or “consols” as I now like to call them,
but consols are well-known in the UK and the US. They have a long history
in both countries. In the UK they were used, among other things, to finance the
wars against Napoleon and to finance the First World War. In the US they were
introduced in the 1870s.
As its name suggests, the principal amount of a
perpetual bond never has to be repaid; only the annual interest payments are
due. A € 1 trillion bond would cost € 5 billion a year, assuming an interest
rate of 0.5%. The consols would not need to be sold all at once; they could be
issued in tranches and they would be snatched up by long-term investors like
life insurance companies who are looking for long-term bonds to match their
liabilities. As the markets familiarize themselves with the new instruments,
later tranches would attract a larger set of buyers and eventually the bonds
would fetch a premium. This is a very good time to issue long-term bonds.
Germany has recently sold a 30-year government bond with a negative
yield.
Unfortunately, my suggestion for perpetual bonds
has been confused with “corona bonds” and this has poisoned the debate. The two
have nothing to do with each other. Corona bonds have been decisively rejected,
and with good reason, given that they require a degree of mutualization that is
simply not acceptable. That is why I now speak about “consols”. The only mutual
obligation is the payment of the annual interest, which is negligible. €5
billion annually secures an urgently required €1 trillion – an amazingly low
cost/benefit ratio of 1:200! That degree of mutualization should be easily
accepted by the member states acting either unanimously or by a coalition of
the willing.
Understandably, the so-called Hanseatic League
countries, such as the Netherlands, want to keep their contribution to the
European budget to a minimum. However, they are now faced with a choice: they can
continue opposing consols and accept a doubling of the budget or they can
become enthusiastic supporters of consols and, if they succeed, increase their
contribution to the budget by 5%. I urge the Hanseatic League and the Dutch
public to ponder which alternative is preferable.
Aren’t there any legal problems for the EU in
issuing perpetual bonds or consols as you call them?
Yes there are and they are seemingly
insurmountable. The EU must maintain a AAA rating, otherwise the bonds would be
unsaleable. That requires the EU to have what is called sufficient “own
resources” – taxes that can be levied to cover the cost of servicing the bonds.
Imposing taxes is a long drawn out process, because each country has its own
rules and in some of them like Belgium the rules are very complicated. The
process would take several years and that is why I said that the legal
obstacles are seemingly insurmountable.
But there is a solution. The taxes only have to
be authorized; they don’t need to be implemented. Authorization should take a
few weeks, not a few years. Once they are authorized the EU could go ahead and
issue perpetual bonds or consols. Perpetual bonds have a tremendous advantage
over bonds that have a termination date. As their name implies the principal
never has to be repaid; only the annual interest is payable. As I mentioned
earlier, that amount is so minimal that it should be easily subscribed by the
member states. It should be particularly attractive to the Hanseatic League led
by the Netherlands. That is why the Hanseatic League ought to become
enthusiastic supporters. In Germany, Angela Merkel is still Chancellor, and she
is the only person who can overrule the ordo-liberal establishment. With their
support, the Euro Summit expected to be held on May 27th may still accept
consols as a desirable alternative to be explored, but time is extremely short.
A previously totally unknown instrument needs to be understood and adopted.
What happens if your solution is not
accepted?
Exceptional circumstances require exceptional
measures. Perpetual bonds or consols are such a measure. They should not even
be considered in normal times. But if the EU is unable to consider it now, it
may not be able to survive the challenges it currently confronts. This is not a
theoretical possibility; it may be the tragic reality.
The coronavirus and climate change are
threatening not only people’s lives but the survival of our civilization.
The European Union is particularly vulnerable
because it is based on the rule of law and the wheels of justice turn
proverbially slowly. By contrast the coronavirus moves very fast and in
unpredictable ways.
That is why the EU needs to issue perpetual
bonds. Issuing bonds whose cost/benefit ratio is 1:200 opens up an amazing amount
of fiscal space. The money raised does not have to be distributed according to
the so-called fiscal key, i.e. member states’ shareholding in the ECB. It can
be allocated to those in the greatest need. Most of the money would go to the
Southern countries because they were the hardest hit and within those countries
they could assist people who are most in need and who are most needed, like
unregistered agricultural workers. Some of this is already happening but the
amount of money available would be greatly increased.
You’re an outspoken supporter of the
Remain-campaign. What could the EU have done to avoid a Brexit? And should it
prevent other member-states from exiting the union?
There is no point crying over spilled milk. But
the question of how to prevent other countries from following the UK is an
important one.
I am particularly concerned about Italy. Matteo
Salvini, the leader of the Lega party, is agitating for the country to leave
the euro and the EU. Fortunately, his personal popularity has declined since he
left the government, but his advocacy is gaining momentum. What would be left
of Europe without Italy? Italy used to be the most pro-European country.
Italians trusted Europe more than their own governments, and with good reason.
But they were badly treated during the refugee crisis of 2015. The EU enforced
the so-called Dublin Regulations that put all the burden on the countries where
refugees first landed and did not offer any financial burden sharing. That is
when Italians decide to vote for Salvini’s Lega and the Five Star Movement in a
landslide. More recently, the relaxation of state aid rules, which favour
Germany, has been particularly unfair to Italy, which was already the sick man
of Europe and then the hardest hit by COVID-19.
You sound very pessimistic.
Not at all. As long as I can come up with ideas
like perpetual bonds I don’t give up hope.
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26 May 2020