George Soros probably understands the nature of the immediate problem facing the Eurozone. Namely, the accelerating bank run which, amongst other things, potentially exposes Germany to trillions of contingent euro liabilities. But even Soros reflects the prevailing – and mistaken – view that Greece might need to become the sacrificial lamb required to save the euro. He said as much in a recent interview in Der Spiegel.
Questioned about his proposal to rescue the European Monetary Union via a Debt Reduction Fund, Soros was asked whether this measure could also save Greece, “Unlikely. Rescuing Greece would require an enormous kind of magnanimity and generosity. The situation there has simply become too poisoned. I think that by standing firm and not compromising on Greece, Angela Merkel would be in a better position to persuade the German public to be more generous toward other nations and distinguish between the good guys and bad guys in Europe.” Policy makers, market practitioners, indeed anyone like Soros, who keeps saying, “Well, we might have to sacrifice Greece ‘pour decourager les autres” fails to recognize that this type of attitude actually exacerbates the fatal flaw in the euro’s architecture and makes its ultimate demise more likely, not less. The same issues that confront the euro zone today would intensify in the event of a Greek exit.
As Yanis Varoufakis has noted “the lack of a constitutional (or Treaty-enabled) process for exiting the Eurozone has a solid logic behind it. The whole point of creating the common currency was to impress the markets that it is a permanent union that will guarantee huge losses to anyone bold enough to bet against its solidity.” As Varoufakis argues, a single exit suffices to punch a hole through this perceived solidity. It goes back to the fundamental flaw cited by Peter Garber at the time of the euro’s inception. As long as there was no perceived probability of euro exit by any euro nation, the established transfer system coupling private markets with European system of Central Bank support (Target 2, ELA, ECB repos) would function like any other monetary system in a single nation state.