Comment on the “Tragedy of the European Union” by George Soros

Georg Soros condenses the problems of the euro with his remarkable ability to boil down a complex issue to its essential components. I would like to comment on two points. The first one connects the fate of the euro with that of the European project as such, and the second one is that there are two, and only two, alternatives for rescuing Europe.

The emphasis on the fact that an eventual break-up of the euro will destroy the common market and the European Union is essential, and I agree wholeheartedly with this point. Soros correctly states that, in this case, Europe would be worse off than before the effort to unite actually began because the break-up would leave a legacy of mutual mistrust and hostility.

The message that the future of the euro cannot be separated from the future of Europe is not a trivial statement. Many scholars and politicians suggest that Europe can live without the euro (or with a much smaller number of “core” members, namely the ‘virtuous’ northern ones). This is simply not true since, if you reverse the dynamics of integration, they will never develop again. If the southern European countries are amputated from the Union, others will simply follow, and the market will start to speculate on who is next. Southern Europe is the bridge to Africa, to the Arab world, to the Black Sea Area, to Central Asia etc. Today Europe is the largest economic region in the world, and together with its neighbors it is a region growing faster than the US, keeping an approximate share of 30-35% of world output, higher than that of the US and China in 2050. Europe, defined as a club of 5-7 nations (Germany, the Netherlands, Finland, Austria plus possibly France), will have less than 10% of world output in 2050. It will shape neither international institutions nor globalization (something many Americans would love).

George Soros’ second main message is that Europe has two and only two options.

The first one is that Germany becomes a “benevolent dictator”. Ignore the additional comment of “like the US”. In some phases, the US was a benevolent dictator: the Marshall Plan enabled European reconstruction after WWII and rescued Europe from socialist (communist) dominance. This was benevolent dominance (driven also by the not completely altruistic goal of preventing the spread of communism). But periods in which benevolence dominated US politics are rare episodes. One must only look at Vietnam, South Africa, and Chile. Even if US benevolence after World War II is appreciated, no dominance in history was purely benevolent in the long run or for the majority of the people. So let us forget the suggestion of Germany becoming a benevolent dictator.

The alternative is for Germany to leave the eurozone. Certainly, the way Germany behaves today, i.e. beggaring its neighbors by reducing wages, social costs and environmental standards, is not the way a leading economy should behave, neither in its own interest, nor in terms of showing solidarity in a community. Furthermore, Germany advocates its “low road model” of fiscal prudence and low inflation to all other countries. It is true that Germany currently displays higher growth and lower unemployment than other “less virtuous” countries, but that is after a full decade of being the sick man of Europe. Germany can never be a benevolent dictator since it oscillates between a depressive mood and exuberance depending on short-term performance. But maybe it can be as benevolent as the US. Look at the precondition for Germany’s help to Greece, namely the enforced promise on the part of the Greeks not to terminate the contracts to buy weapons and aircraft from Germany.

Leaving the euro is not feasible. If Germany left the euro, its new currency would appreciate in the short run, putting Germany back to its position in 2000, when it had lost its single growth driving machine – the competitiveness of its exports. Germany has a weak education system, according to the Pisa ratings, somewhere in the middle at best. It has rather inward-oriented universities and lacks high-tech industries (while being excellent in medium-tech). If Germany left, the Netherlands, Austria, and Finland would probably also ponder leaving or would at least peg their currency to the German euro (which would be a club of “Germany plus friends”, with Germany totally dominating). What France would do in this case is totally unclear since France is politically and historically pegged to Germany, even if it does not share the German goals of thriftiness and has twin deficits in public finances and external trade.

So Germany can neither become a benevolent dictator nor leave the euro. And George Soros knows this. He uses the dichotomy as a helpful provocation. Germany should know that, being the strongest member of the Eurozone, it cannot pursue a strategy of preventing any long-term solution of debt mutualization or a banking union and of limiting transfers to peripheral regions. If it does not cooperate in the long run (creating a banking union, defining the European Central Bank as a lender of last resort, pursuing a pro-growth strategy in a consolidation period), Germany itself will eventually suffer even if the last three years looked good. Alternatively, Germany could cooperate with other countries, especially in Scandinavia, to switch to a high road strategy, leading Europe to a better model than the US (which would be more inclusive and more sustainable; see the WWWforEurope project coordinated by WIFO). Furthermore, Germany should know that, if it chooses to take a separate path alone, all its virtues will be futile in the face of globalization. Its share of world trade will decrease from year to year, becoming a homogenous but very small allotment with a share of between 3% and 4% of the world economy.

Having agreed with one message and having accepted the alternative of Germany as “dictating or leaving” as a fruitful provocation, I allow myself a critical remark about George Soros’ wording (and his title): we should not jump too quickly from a problem Europe has to solve to the scenario of Europe breaking up and forecast a tragedy (many people will follow the title and forget the content). I do not want to speculate about the end of US society if the growth of income disparity and the rise of poverty in the US continue, or if a wealthy minority can persuade the US electorate that health insurance is bad and lower taxes for billionaires relative to secretaries is a natural thing. The use of the word “tragedy” in a critique engenders to a large extent a self-fulfilling prophecy, especially if it relates to a subject watched carefully by the financial markets. I personally like to reserve the word tragedy for large unsolvable problems. But I know that George Soros, who is in principle less negative about the euro than most US and UK citizens, may transform the word tragedy into some form of energy for reform.

Fortunately, the US will survive even if the majority of people have stagnant or declining incomes and the minority will benevolently sponsor the poor. And Europe will survive even if nationalist and populist politicians prevent the euro from replacing the dollar as the leading currency in the next decade (after which the Renminbi will take over). George Soros´ analysis will help Europe find a better way to repair its governance system. The message that the future of the euro decides the future of Europe is as helpful as the hidden message that Germany is currently blocking reforms and needs to change its policy in its own interest. The suggestion that the new growth path should be different from the current one (more dynamic, more inclusive, more sustainable, and more stable with financial markets, thus serving the real economy) is my own and I would like to offer it to George Soros as a compensation for his rather bleak insights.

October 10, 2012

Karl Aiginger is Director of WIFO (Österreichisches Institut für Wirtschaftsforschung), Professor of Economics and Coordinator of the project A new growth path for Europe within the 7th European Framework Program.


Aiginger, K., The Great Recession vs. the Great Depression: Stylized Facts on Siblings That Were Given Different Foster Parents, Economics, Vol. 4, 2010-18.

Aiginger, K., Leoni, Th., Germany needs a new growth path, FES Perspective, October 2012.

WWWforEurope: Europe moving towards a new path of economic growth and social development, 7th Framework Programme.

George Soros
The Tragedy of the European Union

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