Billionaire investor George Soros talks about the European debt crisis

Q: You’ve come to the world Economic Forum with a message for Europe. An urgent appeal. Is Europe listening?

GS: Yes, and we have some disagreement also. And I think that’s good have it out because there is basically a disagreement between Germany and I will say practically the rest of the world.

Q: So Wolfgang Schauble, the finance Minister of Germany answered your call for action, the plan that you put on the table directly and said no that’s not the way to go. What happens if Germany continues to pursue the kind of austerity that Schauble would like to see and there is no meaningful movement towards a fiscal union, towards the kind of programs and policies that you advocate?

GS: We must have this out and discuss it. We now have the beginning of a discussion. Now it gets complicated but it is very important. He says that only austerity and structural reforms will work. Now, I recognize the need for structural reforms. I think and that you need to take a two-phase approach. You actually must now impose this austerity and structural reforms because Germany is not willing to be the deep pocket, financing the deficits of the other countries and they have a right to take that position. So they are dictating this. But once they do it, Schauble says that will get us out of the trouble because that’s how Germany also got out of the trouble. But what applied to Germany in the 1990s doesn’t work for Europe in 2012. So there has to be a second phase. And I think it’s important that they should start thinking about it because without it, the situation is hopeless. And without hope, people don’t act the right way. And it’s not that difficult to recognize that once you’ve got austerity and these labor reforms that you need and so on, you then still need a stimulus and you must find some way of stimulating the economy because there is a deficiency of demand In the world.

Q: George, what happens if there’s no deal on Greek debt restructuring? Is that a disaster? Or does it not really matter?

GS: Well, that’s a near term situation. Now we are talking about the longer term. Sure. Now, coming back to the near term, I think that if Greece defaults, it should not be the end of the road. But the rest of Europe needs to be sufficiently ring-fenced and not enough is being done to ring fence it. And therefore, it would become. Right now if Greece were to default at the end of March or April, that would be a very severe test for the global financial markets because not enough has been done to isolate the rest of the Eurozone from Greece. I had a proposal for that which didn’t come up in discussion with Schauble. I’ll be very interested to hear what he has to say. You could actually arrange for Italy and Spain to borrow short term. Short term only, but at 1%.

Q: Would they eventually have to restructure their debts anyway?

GS: No.

Q: So you think you would be able to avoid a debt restructure in Italy?

GS: Italy is on a difficult course both economically and politically. You have a reformist, democratic government. They are introducing those reforms that are needed. They have rather heavy accumulated debt. If they can refinance the debt on which they currently pay 4.3%, they can refinance it at 1%.That means that they gain 3% on the GDP. So they don’t have to be quite as austere as they would be otherwise.

Q: George, are financial markets playing a constructive role in the Eurozone crisis?

GS: No. The financial markets always look for the weak point and they attack the weak point. And unfortunately, there are a lot of weak points.

Q: But are the prices a reliable gauge of risk and vulnerability?

GS: No. Markets are not always right. The markets have moods. And there’s an interaction between the authorities and the markets and it is really the job of the authorities to show that they are in control and that they have adequate resources and they have a plan. And that the European authorities haven’t yet learned. So they are disunited. You’ve got very different points in different countries. Within Germany itself, you have got the Bundesbank that takes a very conservative view. You have the politicians that recognize the need to change things. Even within Germany you have disunity.

Q: Can you blame investors, you’ve been one, for trying to force the issue?

GS: No you cannot blame them. I have often been blamed for destroying things, but it’s like shooting the messenger that delivers the bad news. There is still bad news, whether you shoot the messenger or not.

Q: As you point out, you and other investors have famously taken advantage of unsustainable situations in other countries. Aren’t the kinds of policies that we see in place today similarly unsustainable? The Fed nor the ECB can continue inflating their balance sheets forever. The Swiss National Bank can’t depress the value of the Swiss bank forever. Does that create similar opportunities to the ones that you took advantage of?

GS: Opportunities are dangerous. I am no longer speculating on the market. I am now in a sort of a game piece trying to keep the system together because I really think it matters for all of us, for humanity, for hedge fund managers as human beings that our civilization should survive. So right now I am sort of on the side of the angels not a player along to play. Now, the trouble is that you have got the imbalances in the market, and the measures that are being taken do not necessarily correct the imbalances. And right now some of the imbalances are still growing. But I think they could be managed. That means you have got to have certain secrets. When a car is skidding, sometimes you have to turn the wheel in the same direction of the skid. And only when you have regained control, then you can correct it. So right now, it is necessary to impose austerity. But once you have done it, then you have to find a stimulus to get the economy going.

• Interview courtesy of Bloomberg Television