The developing countries will be affected by the European financial crisis, but not as much as the developed world, Hungarian-American investor and philanthropist, Mr George Soros, said here on Monday.
Participating at the public lecture series conducted by Azim Premji University, he said that the sovereign debt crisis in Europe will have its repercussions in the US. “The developing world will be less affected than the developed world. There will be a tremendous shift from developed to the developing world. However, the rate of growth will decline. While it will still remain positive for here (developing countries), it will be negative in the developed world,” said Mr Soros. “We are in a more dangerous situation than 2008,” he added. If a large European bank fails, it will have global financial implications. The European crisis is a direct consequence of over use of sovereign credit, and what is missing in Europe is a Central Bank, which is important to handle such crisis. “They are now in the process of creating a fund,” he said. It is 780-billion euro “embryo of treasury but not a fully-formed one,” he added.
There is a “prospect of a deflationary vicious cycle” endangering the real economy. “The process of deleveraging is already happening and will see the consequence,” pointed out Mr Soros. If the current situation is brought under control, then there will be a period of austerity, he added.
Globalisation and deregulation went hand in hand, he said, explaining the causes for the financial crises. He pointed out that there has been tightening of regulation, “but it has not been very successful”. Every time there was a crisis, there has been a regulatory response.
Explaining that markets don't always trend towards equilibrium, he said that they follow a boom bust sequence.
‘Reflexive inter-play'
According to him, it was always an interplay between regulators and market participants. “It's a reflexive inter-play… sometimes it takes you close to the equilibrium, sometimes it takes you far away,” explained Mr Soros. Financial markets have grown too big and too powerful, he added.
The need of the hour is a re-think on the “very fundamentals of economic theories,” he said, adding that the axioms on which they have been built bear very little resemblance to the real world.