George Soros: The Crisis and the Future of an Open Society in Europe

Yesterday marked the arrival of distinguished investor, George Soros in Barcelona, to announce the opening of an Open Society Foundation in the city. His presence was marked by a Q&A session in which local investors and media were invited to ask questions regarding his hopes and concerns for the future of the continent.

Soros began by offering the audience an overview of his investment approach and the driving forces which helped shape his worldview. He explained that having grown up at a time that saw him live under both Nazi and Soviet occupation, he was extremely philosophically influenced. He was greatly influenced by the work of Popper, who helped him to cultivate his conceptual philosophical framework and Soros humorously added that at their first meeting, Popper was disappointed to learn that Soros was Hungarian and not American. This, he notes, was because Soros came from a similar background with matching experiences, and he had hoped that he had started to make an impact on the US. Philosophically, Soros attributes his education and theories as being instrumental in his financial success.

He proceeded to note that around the age of 50, after much success as a trader and fund manager, he started to question what he was doing with his life. During his “mid-life crisis”, He determined that he had already amassed enough money for his life and his family to be secure and that continuing to work so hard, was jeopardising to his health and family, for rewards which had already been achieved. He notes that it was then that he decided to use his financial talents to promote a his concept of a better world. By remaining active in the markets, he found that he was able to fund foundations in deserving areas of the world, with the aim of promoting a fairer, more open society. When asked how he would describe an open society, he answered, “An open society, is not a perfect society, rather an imperfect society which is open to self improvement.”

“An open society, is not a perfect society, rather an imperfect society which is open to self improvement.”

Examining why he had decided to open an Open Society Foundation in Europe, he reflected that he had grave concerns for the direction that Europe was heading, and that for all the optimism that surrounded the creation of the European union, mistakes and misunderstandings were rapidly unraveling the progress that had been made at an alarming rate. Looking back to the formation of the EU, he notes that it represented a period of solidarity and unity, where member nations were willing to relinquish elements of sovereignty for the greater good. However, through self inflicted mistakes, the union had moved from a union of solidarity, to a relationship of debtors and creditors which he sees as damaging and more importantly dangerous. In short, he believes that the policies being implemented on the region were catastrophic, and were threatening to turn a bad recession, into crippling depression.

His aim is to stop the rot by changing the dynamics of the agenda and he added that his appearance in Barcelona had been preceded by a visit to Frankfurt where he had aimed to make similar pleas to a German audience. He noted that for all of the ingrained doctrine of the Germans, they are an astonishingly liberal society, and he was able to speak openly to the Centre of Financial Studies, which is closely aligned with the Bundesbank. However, he added that as much as they had respected their views, he had to respect their decision to continue with the current course of action, as that is what defines an honest and open relationship. However, he feels that the tide of evidence is starting to build, and he hopes that it will be accepted before too late. Again, he repeated that the spirit of solidarity had been lost, and replaced with a growing sense of hostility and mutual resentment.

Tax Havens, Corruption and Greed

When probed on his views on Tax Havens, he candidly noted that he had used them in the past, and they had greatly contributed to the success of his fund. He had no remorse about doing so, as he was playing within the rules, but as a citizen, he supports their elimination, and as a foundation, they are actively working towards it. A similar question on corruption caused Soros to make the stark comparison with the War on Drugs in the US. He believes that you will never get a drug free America, and you will never have a world free of corruption. He feels that the best you can do is try to minimise it through transparency and understanding.

When examining the roots of the current Eurozone crisis, Soros made a decisive point which contradicts much of the deflectory rhetoric that comes out of Brussels. He was asked whether greed was at the root of the crisis, a question which bears resemblance to many Eurozone leaders statements, who have seen to scapegoat the financial industry and especially the City of London, itself a target of a proposed Tobin Tax which could destroy its position as a financial centre. Soros, believes that the crisis has been a self inflicted crisis. In his view, the Eurozone debt crisis has been created by misconceptions, misunderstandings and mistakes and that he didn't believe that bad intentions were at the root of the crisis. Further, he believes that the Euro is inherently flawed and has been the catalyst for much of the destruction being seen today.

In his view, the Eurozone debt crisis has been created by misconceptions, misunderstandings and mistakes and he didn't believe that bad intentions were at the root of the crisis.

He repeated that evidence was starting to mount against current strategy, but reminded the audience that much as the American´s psyches are shaped by the Great Depression, Germans alike have been shaped by memories of the Weimar Crisis which saw hyperinflation and the rise of the Nazi Party. It will be a slow process to get them to change their minds, but evidence in mounting. Additionally, he made a stark comparison with the Eurozone and Japan, noting that with the BoJ´s recent overhaul and adoption of unprecedented levels of easing, the Eurozone was now isolated in terms of policy.

Additionally, he noted that the Japanese monetary revolution has come after 25 years of stagnation, and is a colossal risk as after two and a half decades of misguided policy, debt has grown to 234% of GDP. Soros feels that had they taken current steps much sooner, the recovery would be much more secure, but as it stands now they are taking a last throw of the dice gamble. With the Eurozone crisis in its early stages, his concerns are that leaders will not learn from the mistakes of others.

Regulation and Misconceptions

Soros was then questioned on whether further regulation was the key to preventing future crises´s, again a question which echoes the rhetoric often heard out of Brussels. He answered bluntly, no. He believes that not more, but better regulation was needed, and maybe even less is better. He succinctly highlighted the inefficiency of regulation, stating that regulators have an imperfect understanding of financial markets and will always struggle to apply rigged rules on flexible markets. Further, with regulation, comes the risk of political interference, which can create bubbles, and lead to boom bust scenarios. Instead, he left the question by noting that perhaps the best approach is to use markets against themselves to regulate.

He finished by addressing questions on Spain and Greece, and instantly dismissed that there was any semblance between the two nations. Greece, in his view had quite blatantly broken the rules set out in the Maastricht Treaty, whereas Spain was an picture of virtue, with regulators responding appropriately, but not strongly enough, to force lenders to raise reserve requirement ratios in response to a housing bubble. He believed that Spain´s troubles were imported from the subprime crisis in the US and had been exasperated by Eurozone policies.

He still has great hopes that the continent could rediscover the feeling of solidarity and companionship.

Soros finished this entertaining Q&A session by commenting that while he has concerns for Europe, he still has great hopes that the continent could rediscover the feeling of solidarity and companionship that had brought together all member nations in the first place.