Soros tells Germany to lead or leave euro zone

To prevent the present confrontation between debtors and creditors becoming permanent would require a fully-fledged “European fiscal authority” (EFA) – a sort of European monetary fund – which would assume the solvency risk of all government bonds purchased by the ECB, he said.

The euro zone should aim for nominal growth of at least 5 per cent, with higher inflation – for a limited period – than the German Bundesbank has ever been prepared to allow. Without the prospect of growth, the debtors would remain in a “deflationary trap” and eventually be forced to default.

An EFA would take over the euro zone rescue funds – the €440 billion European Financial Stability Facility and the €500 billion European Stability Mechanism – and establish a “debt reduction fund”.

The latter, very similar to a “debt redemption fund” proposed by the council of economic advisers to the German government, would acquire all euro zone government debt in excess of 60 per cent of their GDP – the debt ceiling at which they are supposed to aim. The fund would then issue “debt reduction bills” as a joint obligation of the euro zone countries.

Mr Soros suggested they should be treated as the highest quality collateral by the ECB and would be attractive to investors. “You have about €700 billion of deposits at the ECB which currently earn zero interest,” he said. “Instead of keeping that money with the ECB, the banks would put it into these bills, which would have an interest rate better than zero.”

The concept of giving euro zone debt a joint guarantee is fiercely resisted in the German government. Chancellor Angela Merkel and finance minister Wolfgang Schäuble agree that it cannot happen until a “fiscal union” has been established in Europe to police budget discipline.

Many of their supporters reject the idea outright.

“Unless they change their view of the euro, they are – without intending it – pushing Europe into an intolerable situation,” Mr Soros added. “My real concern is that the euro is now endangering the EU. If it falls apart in acrimony, Europe will be worse off than it was before it started.”

He said he expected to be attacked in Germany for speaking as a financial speculator, “but I am not only a speculator. I have effectively retired. I think it is appropriate to speak out at my age.” – (Copyright The Financial Times Limited 2012)