George Soros keeping us out of the euro was worth the $1bn he made shorting the pound during the ERM crisis
George Soros has been in London this week to promote his latest book, The Tragedy of the European Union Photo: Reuters
George Soros is best known in Britain not as the magnanimous philanthropist he now is, but as the “man who broke the Bank of England”, an episode in which he still seems to take some pride, judging by remarks he made in London this week.
No, he wasn’t boasting of his reputed $1bn profit from shorting the pound at the height of the European Exchange Rate Mechanism (ERM) crisis, but what he considers to be Britain’s almost uniquely well-placed position in Europe as both within the European Union but outside the eurozone.
This happy disposition – if that’s what it is – would, I suspect, have come about whether or not Mr Soros had virtually exhausted the Bank of England of its foreign exchange reserves in pursuit of his speculative attack, but no doubt he did play some part.
These days, Mr Soros commands much respect, even adulation, in some parts of Eastern Europe for his philanthropic work in promoting the democratic virtues of open societies.
But it was not always thus. To his obvious discomfort, Mr Soros was treated with utter contempt by the then UK Chancellor, Kenneth Clarke, in a debate at the World Economic Forum in Davos shortly after the ERM debacle. Mr Clarke could not disguise his disgust. He virtually refused to acknowledge that Mr Soros was even on the same platform, while at the same time managing to dismiss all he said as complete tosh.
This was understandable given what had happened, but not particularly clever. It’s often forgotten that, even after forced withdrawal, Mr Clarke wanted to take Britain back into the ERM as a precursor to joining the euro, even though this would have meant again imposing inappropriately high interest rates.
Mr Soros’s motive was not, of course, that of saving Britain from economic catastrophe; his was the naked self-interest of making vast sums of money. But his team was spot-on in its analysis of the situation. Germany’s post-unification boom required that interest rates were held much higher within the ERM than was appropriate for recession-engulfed Britain. To stay in the ERM, Britain was therefore forced to raise rates, rather than cut them as the economy demanded. UK national interests became subservient to those of Germany. When Helmut Schlesinger, then president of the Deutsche Bundesbank, said in an interview with Handelsblatt that the pound was overvalued within the ERM, the implication being that, contrary to the rules, the Bundesbank would not defend the pound at its prevailing rate, the game was up.
The whole episode so poisoned British public and political opinion against Europe that there could subsequently be no question of the UK joining the euro, despite Tony Blair’s later endeavours to turn the tide. Rightly or wrongly, the British felt betrayed by Germany and its allies, who, it seemed, would always run the show in their own interests. Euroscepticism became permanently embedded in the British psyche.
Mr Soros has been in London this week to promote his latest book, The Tragedy of the European Union. This is less of a book than a series of interviews in which Mr Soros touches on many of the issues that emerged back then, but with the advent of the euro have now exploded into a much bigger and all-embracing crisis. For Mr Soros, the “tragedy” lies in the EU’s transformation from a generally benign, even noble, endeavour in which countries gave up a little sovereignty in return for international harmony, into a spiteful and fast-disintegrating economic mess in which the union is run by, and in the interests of, its creditors.
The German Bundestag can thus dictate to the Spanish parliament how it should manage its affairs, but the Spanish have no say over the Bundestag. Economic policy in Europe has become subservient to perceived German interest.
Yet it is quite wrong to see this as the end result of some kind of German conspiracy, final success where two world wars had failed. In fact, the Germans are as unhappy about it as everyone else. This overly simplistic interpretation of the way the single currency has panned out is nevertheless how the tragedy is sometimes portrayed. Not by Mr Soros, however, who rightly calls it “a crisis of ignorance”, a predicament Europe hubristically stumbled into by mistake and now lacks the leadership and imagination to resolve. So thanks, Mr Soros, for your part in ensuring that the UK is still on the sidelines of this still unfolding tragedy. It was worth the $1bn.
Emerging anxieties
The investment definition of an emerging market used to be one from which it is impossible to emerge in a crisis. Then along came the credit crunch and the eurozone crisis; the risk appeared to lie much more in previously stable, advanced economies. All of a sudden, high-growth emerging markets looked safe by comparison. What goes around comes around; Western economies are slowly recovering, and emerging markets are again taking a beating. In some cases, it is indeed proving quite difficult to get your capital out.
With Russia, it’s geo-political risk that focuses the mind. Putin appears to have turned his back on the West; it’s the point of no return. With Brazil, it’s simply failure to build on earlier promise, and, with India, it’s political paralysis and tapering. And then there’s the big one, China, which grew fat on overheating in the West, but must now find a different economic model to feed its growth. It’s proving a difficult transition. Growth is slowing, and some sort of financial crisis is plainly already under way.
What does all this mean for Western stock markets? If we take US and European markets since the credit-crisis low point of March 2009, there has been a dramatic surge in prices, but even in the States, this has not really been supported by profits. It’s all about higher valuations, rather than higher earnings. It is the promise of future earnings growth, rather than the present reality, which supports stock prices at present, QE-inflated levels. It scarcely needs saying that this makes them highly vulnerable to shocks, as well as any deterioration in the macro environment. Prepare for a bumpy ride ahead.
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