Book review - George Soros 'The Tragedy of the European Union: Disintegration or Revival?'

Over on his Forbes blog, Open Europe’s Raoul Ruparel provides a review of George Soros’ latest book ‘The Tragedy of the European Union: Disintegration or Revival?’ off the back of the event we hosted with him last night (the full write up of which can be found here).

The abstract of the book notes:

“The euro crisis was not an inevitable consequence of integration, but a result of avoidable mistakes in politics, economics and finance; the excessive faith in the self-regulating financial markets that Soros calls market fundamentalism inspired flawed institutional structures that call out for reform. Despite the considerable perils of this period, George Soros maintains his faith in the European Union as a model of open society.”

In his interviews Soros focuses on the failings of Europe during the eurozone crisis – specifically looking at the structural flaws in the euro and the role of Germany. Soros posits that the crisis could have been averted, or at least ended earlier, if Germany had taken the lead in the eurozone and allowed for greater solidarity through fiscal union. He also suggests the future of Europe could be marred by on-going political crises and economic stagnation if these flaws are not corrected.

Raoul argues that:

“His comments in general are interesting and for the most part accurate. However, he remained overly optimistic on the prospects for the euro despite these flaws and even called on the UK to join the single currency.”

“In particular there seems to be an inconsistency between his desire for greater centralisation and a firm grounding in democracy and an “open society” (which is transparent and responsive). It seems that behind Soros’ approach is the assumption of a European demos. However, I fundamentally believe that this is simply not the case.”

“While I do not believe the goals Soros outlines are readily achievable at this point in Europe, the one thing that comes through during the book is that this is not a policy proposal but a pitch to try to bring the reader round to his ambitious goals for Europe despite the current problems.”

One part which isn’t discussed on the blog is Soros’ view of the UK’s position in the EU. At our event he described the UK’s current position as “the best of both worlds” and called on it to rediscover its “European identity”. This comes through in the book as well, where he warns against a Brexit and accuses the UK of “blackmailing” the rest of the EU with the threat of an exit.

However, it doesn’t entirely fit with his broader view of the EU and the eurozone, which he believes needs much deeper integration. If that were to happen (and it is to some extent albeit more slowly than Soros would like) it would fundamentally change the UK’s position in the EU and the makeup of the EU itself. He seems to review the UK’s position in a much more static way than he does the EU and euro which he views as largely fluid.

This context also makes his “blackmail” comments a bit strange since part of the UK’s move is in response to the crisis. It also does not fit with his idea of an open society and democracy, given that many in the UK are keen to see a reformed EU and a referendum.

Nevertheless, it’s an interesting book and certainly worth a read if you’re looking for an overview of the current crisis and some historical factors around it as well as thoughts on the future.

Will the pound really take a beating from the UK's debate on Europe?

Ahead of David Cameron's incredibly hyped speech, a bit of a foreign exchange side-debate has developed with some analysts suggesting that sterling could weaken significantly as talk of the UK leaving the EU increases uncertainty, while the eurozone starts to recover. Are such fears valid?

 

·         As we have pointed out repeatedly in recent days, the debate is not yet about a straight in or out - but whether the UK should seek new EU membership terms.Unfortunately, currency markets (notoriously volatile) may not capture that, even if businesses do.

·         In our view, if you're a currency analyst, there are more important issues that could drive sterling lower than the intensified EU debate, including the threat of a triple-dip recession, loss of the UK’s triple-A rating, continuing to miss debt and deficit targets and the election campaign in 2014/2015. Ultimately, we’d expect currency markets to take the lead from the UK’s wider economic policy than just the UK-EU issue.

·         As we discussed in detail in our outlook for2013, there is still a lot of uncertainty in the eurozone, particularly with the Italian elections and the fact that the structural flaws have not been solved. The ECB is also still providing copies amounts of liquidity with a very loose monetary policy. Although, the latter has helped strengthen the euro at times, we think there is a limit to how far this can go. During the crisis, the repatriation of assets from abroad by banks and firms in the eurozone has propped up the currency, as the situation improves slightly this may slow. These factors combined could cap any substantial strengthening of the euro.  

·         Although sterling has weakened in recent days, other indicators of safe haven flows, such as UK borrowing costs and the London property market, have continued to suggest that there is still very strong demand for UK assets.

·         Given that safe haven flows have continued for some time, sterling may be inflated above where it normally would have settled, as such any change may simply be a correction to the norm as markets turn more positive.

·         Currency strength is significantly determined by central bank action these days. With the US Fed planning to keep policy loose for the foreseeable future (and keen to have a weak dollar) and the ECB of the same mind-set, sterling may continue to be seen as an attractive option. The Swiss National Bank will also have to unwind its massive foreign currency reserves at some point, given that a significant amount of this is in euro it could weaken the currency.

·         In terms of impact on the UK, a weaker pound could aid the UK in terms of boosting exports. However, given our reliance on imports and the fact that a weaker currency could also see an increase in borrowing costs for the UK a decrease in foreign demand for our assets, the overall impact may not be positive. Sterling has devalued significantly since the start of the financial crisis with the boost to exports being minimal.

There is a good chance that sterling could weaken this year, which may not be good for the UK economy. However, the impact of a potential EU referendum in 2-3 years’ time on the currency should not be overstated. There are plenty of other more pertinent arguments to focus on both for the UK-EU debate and the analysis of sterling.