Humpty Dumpty cannot be put together again

A couple of interesting articles featuring George Soros in Friday’s Irish Times. They serialise an extract from The Soros Lectures where George argues that the current global financial system is broken – and can not be fixed, at least in it’s current form, he discusses the risk of a double dip recession (likely in 2011), the Euro and European integration – of particular significance as his hedge fund played a major role in the collapse of the original ERM. He argues that a divided West Germany was the driving force behind European integration. German reunification has left the European project without an engine and a half-baked currency Union.

In another article they report that Soros’ argues that “if member states cannot take the next steps forward, the euro may fall apart” and that “So makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large a portion of euroland to be helped in this way. The survival of Greece would still leave the future of the euro in question.” Although he does mention Ireland, and the ECB bailout of the Irish banking system coupled with the resounding second Lisbon vote as evidence that there is hope for the European project, and perhaps the world. After all if the European Union struggled act together to solve the the problems underlying the crises, and we have, what chance is there that global consensus can be reached and appropriate measures put in place?

There is a growing belief that the global financial system has once again escaped collapse and we are slowly returning to business as usual. This is a grave misinterpretation of the current situation. Humpty Dumpty cannot be put together again. Let me explain why.

The globalisation of financial markets that took place since the 1980s was a market fundamentalist project spearheaded by the US and the UK. Allowing financial capital to move around freely in the world made it difficult to tax it or to regulate it. This put financial capital into a privileged position. Governments had to pay more attention to the requirements of international capital than to the aspirations of their own people because financial capital could move around more freely. So as a market fundamentalist project, globalisation was highly successful; individual countries found it difficult to resist it. But the system that emerged was fundamentally unstable because it was built on the false premise that financial markets can be safely left to their own devices. That is why it broke down and that is why it cannot be put together again.

The point I am trying to make is that regulations must be international in scope. Without it, financial markets cannot remain global; they would be destroyed by regulatory arbitrage. Businesses would move to the countries where the regulatory climate is the most benign and this would expose other countries to risks they cannot afford to run. Globalisation was so successful because it forced all countries to remove regulations, but the process does not work in reverse. It will be difficult to get countries to agree on uniform regulations.

This can be seen in Europe. During the crisis, Europe could not reach a Europe-wide agreement on guaranteeing its financial system; each country had to guarantee its own. As things stand now, the euro is an incomplete currency. It has a common central bank but it does not have a common treasury – and guaranteeing or injecting equity into banks is a treasury function. The crisis offered an opportunity to remedy this shortfall but Germany stood in the way.

Germany used to be the driving force behind European integration but that was at a time when Germany was willing to pay practically any price for reunification. Today Germany is at odds with the rest of the world in fearing inflation rather than recession and, above all, it does not want to serve as the deep pocket for the rest of Europe. Without a driving force, European integration has ground to a halt.

Fortunately, Europe had the benefit of the social safety net. It was held responsible for holding down European growth rates in good times, but it served its purpose in the downturn and the recession in Euroland was less severe than expected. Now that the fears of an economic collapse have subsided, the EU is showing some signs of political revival. The ECB has effectively bailed out the Irish banking system and Ireland has resoundingly endorsed the Lisbon Treaty. So I may be too pessimistic about Europe.

  • Alias

    “The ECB has effectively bailed out the Irish banking system and Ireland has resoundingly endorsed the Lisbon Treaty. So I may be too pessimistic about Europe.”

    On the contrary, Ireland has effectively bailed out the Eurosystem, since that system engaged in reckless lending to the Irish banking system which carried the systemic risk of bankrupting those reckless lending institutions if the banks they lent recklessly to went into default, and which was averted by the Irish government forcing Irish taxpayers to underwrite all debts to those lenders, thereby averting the systemic risk to the Eurosystem at the expense of bankrupting the Irish nation and its state.

    Soros may recognise the economic folly of monetary union without political union, but doesn’t seem to recognise that the EU and the rabid europhiles in the Irish government were willing to gamble with the economic future of the Irish state by agreeing to integrate this state into the Eurozone as part of the EU’s tried and tested method of step-by-step integration knowing that political and economic union was to follow monetary union but that the dangers to the Irish economy lay in the decade or so that they thought it would take to achieve that political union. In effect, these europhiles sacrificed the Irish economy for a demented political agenda of creating a single European state.

    While the Irish nation may have voted for the Maastricht Treaty on the condition that all debts were sovereign (err, the sub 1% who bothered to read it), it now transpires that all debts are not sovereign after all, and that Ireland – far from receiving free money from the ECB toward relieving the debts that its inappropriate monetary policies credited in this state – now has to assume responsibility for the debts of other states within the Eurozone. The proposed 30 billion bail out for Greece will be paid for by the shareholders of the ECB, which includes Ireland.

    Problems created by giving sovereignty away to foreign agencies who do not operate that sovereignty in our national interest will not be resolved by giving more sovereignty away to them so that more of our national interests can be ignored by them but by recognising that Ireland made the biggest mistake of its short history by joining the Eurozone and that it should now prepare to withdraw from it and regain control of its monetary system and macroeconomic policies.

  • Greenflag

    ‘So I may be too pessimistic about Europe.’

    No may about it .You are . Again the origin of this economic crisis lies in the economic policies pursued over the last 20 -25 years starting with Reagan’s neo conservative free for license to steal granted to the financial services and banking and insurance sectors . Union busting in the private and public sectors added to the downward pressure on average incomes which was ‘expedited ‘ by the ‘tolerance’ of millions of illegal immigrants into the USA . The United States is now a 4 class economy with a tiny 1 to 2 % of the population at the very top who own 85% plus of the wealth followed by a shrinking and ever emisserated middle class followed by a ‘terrified ‘ lower middle class and at the bottom some 50 to 80 million Americans who have zero wealth , are poorly educated and who form effectively a helot class in American society . Some but not all of these people are illegal immigrants -many are poor whites and blacks and hispanics and they form most of the 3,000,000 million now in prison in the USA. The European Union countries have avoided the utter degradation of humanity that exists for the bottom one third of the American population . We Irish , British , Germans , French , Scandinavians etc should be grateful for that much at least .

    As for the Greeks ? What has upset the Germans the most about the Greek Government’s finances is the fact that they lied ( cooked the books back in 2000 when they joined the Eurozone ) Their budget deficit was nowhere near the 3% target but was in double digits probably already close to 12% .We forget that the Greeks had a military dictatorship for well over a decade and we should all have learnet by now that wherever a military dictatorship is in power a kleptocracy is the result .Greek Governance has been riddled with fakkilaki ( kickbacks , payoffs , corruption) to a degree not seen elsewhere in the EU and in the world financial corruption league tables Greece comes in at 71st place a few spots BEHIND Ghana in west Africa . On the same table Ireland comes in at no 14 .

  • Greenflag

    To continue from the above the EU despite the Greek situation and the crisis engendered by the almost criminal fraternities in Wall St and the City of London will provide a far more stable future for all Europeans than any return to the so called ‘sovereignty ‘ of almost 55 individual states each with their own currency and each trying to pretend that they have ‘fiscal ‘ and ‘monetary’ independence .

    Alias above is living in the Europe of the 1920s’. That world is long gone and it’s not returning .

    George Soros is correct when he states that regulations must be international in scope. Of course the banking /financial /insurance and hedge fund investment ‘gangsters ‘ would prefer to continue as they were with being allowed to retain the power to destroy economies and whole nations on the basis of pure corporate or personal greed .

    Whether the politicians of the western developed nations the USA , EU , and Japan , China , Brazil, India and Russia can be made to agree on a new Bretton Woods and stricter regulatory control on international transfers is yet to be seen . No doubt the big boysi.e the Banks of America , Goldman Sachs and others will try to pay off the legislators or somehow find a way to deny , delay or emaciate any necessary reforms .

    These irresponsible ‘financial sector criminal bastards won’t be happy until the red flag given a rebirth and is waved over Moscow , and Berlin , and probably London , Paris,Rome and Madrid as well :(!