By Ambrose Evans-Pritchard, Economics
The Telegraph, UK
Last updated: April 19th, 2012

George Soros is taking on the Bundesbank

George Soros has launched all-out war against the Bundesbank.

In his latest Le Monde interview he said that if he were still an active investor, he would now “bet against the euro”, at least until there is a change in European leadership or policy.

The euro threatens to destroy the European Union and, with the best of intentions, the leaders are leading Europe to its ruin by trying to impose inappropriate rules.

The introduction of the euro has led to divergence instead of bringing about convergence. The most fragile countries of the eurozone have discovered that they are in a Third World situation, as if they were indebted in a foreign currency, with a crucial effect that there is a real risk of default. Trying to make them respect rules that don’t work just makes matters worse. Sadly, the authorities don’t understand this.

Mario Draghi has launched extraordinary measures with his €1 trillion injection of liquidity through three-year loans. But the effect of this operation has been broken by the counter-attack of the Bundesbank.

Watching the growth of the ECB’s balance sheet, the Bundesbank has realised that it risks heavy loses if the euro blows up and is therefore opposed to the (LTRO) policy. Let us hope that this does not become a self-fulfilling prophesy.

It follows a Süddeutsche Zeitung interview last Friday in which he accused “Bundesbank bureaucrats” of standing ready to smash the euro, exceeding their constitutional and political authority.

Mr Soros has some expertise in this field. His cue for launching a speculative attack – with others – on Sterling and the Lira in September 1992 came after Bundesbank chief Helmut Schlesinger told Handelsblatt that the two currencies were overvalued within the ERM peg. There would have to be a realignment.

It was a clear signal that the Bundesbank did not intend to intervene in the markets to defend the ERM pegs – as it later did for France. Mr Soros already had a $1.5bn short position on sterling. He upped the ante massively the next morning. “Go for the jugular,” he told his partner Stanley Druckenmiller.

The story is vividly retold in Sebastian Mallaby’s new book More Money Than God: Hedge Funds and the Making of a New Elite.

We can argue over the conduct of the Bundesbank in that episode. Technically, the bank failed to uphold its ERM obligations. But that is hardly the point. It was being asked to support an untenable arrangement.

The British government had locked the pound to the D-mark with a mixture of ineptitude and bad luck just as the economic cycles in the two countries diverged massively – with Germany going into overheating, and the UK facing a property slump after the Lawson boom. (It was not the exchange rate that was wrong: it was the interest rate – crucial distinction). Bundesbank actions were a liberation for Britain. Soros deserves a knighthood for his part. Dr Schlesinger should be given an honorary peerage.

The current situation is more ambiguous, and much more dangerous.

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