The collapse of the euro will have catastrophic consequences not only for Europe but for the global financial system because of inter-connectedness, said Mr George Soros, Chairman of Soros Fund Management which has assets of about $27 billion.
The euro-zone debt crisis is a direct consequence of the crash of world economy in 2008 and weakening of the currency may lead to the break-up of the European Union itself, he said at an interactive session here today.
“If the common currency broke down, it will then lead to the break-up of the European Union itself. So it is political problem. Thus, euro crisis in my opinion is something more serious and more threatening than the crash of 2008,” he added.
Certain inadequacies in designing the euro have led to the euro-zone crisis that looms large over world economies, said Mr Soros.
“There were also flaws in the design (of euro), of which the authors were not aware and actually which are still not fully recognised or not even fully are still ignored and those flaws are causing the problem,” Mr Soros said.
“The most important of which is that there was a false conception about how financial markets operate. It was assumed that any imbalances would arise only in the public sector.
There was a lack of recognition that financial markets themselves can generate those imbalances,” he added.
The Hungarian-American is in India and participated in an interactive session in the Indian School of Business.
When the euro was introduced, the European Central Bank accepted the government bonds of the member countries at face value, Mr Soros said.
The move brought the interest rates in the various countries very close together and the banks loaded up with the government bonds of the weaker countries.
“That then created imbalances in economic performance, because on the one hand, Germany which is the strongest country (in Europe) had to face the burdens of reunification and therefore had to undergo very serious economic reforms to deal with that,” Mr Soros said.