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Crisis countdown: 90 days to sort the euro disaster

Published time: June 05, 2012 10:19
Edited time: June 05, 2012 14:25
The chairman of the Soros Fund Management, George Soros (AFP Photo / Vincenzo Pinto)

The chairman of the Soros Fund Management, George Soros (AFP Photo / Vincenzo Pinto)

If the eurozone does not agree on the way out of the crisis within three months it could eventually turn into “a German empire with the periphery as the hinterland,” billionaire investor George Soros warns.

Germany will struggle to preserve the euro as a single currency, as a breakup would have dramatic effects both economically and politically, George Soros said. Economically, a euro split would mean huge claims against the periphery economies, with the Bundesbank alone having over a €1 trillion in claims. That’s without any intergovernmental obligations. On top of that, a return to the Deutschemark “would likely price Germany out of its export markets – not to mention the political consequences,” Soros added.

In the end, all the effort from Berlin “would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments.

The statement came as Soros warned of a narrow three months’ window remaining to save the euro and bring the eurozone back to the shape it was when created. The monetary union needs to agree on the way out of the crisis before its locomotive economy – Germany – falls into a downturn itself, he said.

Given the increasing tension in Greece, which has so far failed to form a government capable of meeting the EU terms, “the Greek crisis is liable to come to a climax in the fall,” Soros said.

“By that time the German economy will also be weakening so Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities. That is what creates a three months’ window,” the investor explained.

The German economy has started to ring alarm bells, posting a marginal downturn, according to a May PMI report for the eurozone released on Tuesday – an indicator of business activity in the area. The Final Eurozone Composite Output Index fell to 46.0 in May from its April reading of 46.7. Any figure below 50 points to an economic contraction.

“German output fell for the first time since last November and, although only modest, the rate of decline was the fastest for almost three years,” the PMI report said.

The April data on the change in the volume of industrial orders to be released on Tuesday is also expected to be far from rosy, says Pavel Emelyantsev from Investcafe. Experts’ sentiment is quite negative, as they expect the number to drop 0.9% month to month, which compares to the growth of 2.2% in March. In annual terms the drop in April will stand at 3.8%.