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UFPPC (ufppc.

org) Synopsis July 2014

George Soros with Gregor Peter Schmitz, The Tragedy of the European Union: Disintegration or Revival
(New York: PublicAffairs, March 2014).

[Theses. (1) Only Germany can save the European
Union from the series of political rather than financial
crises, although the latter cannot be excluded, that in
coming years will threaten it with disintegration (94).
(2) (Appendix) Economic theory needs a new
paradigm; Soross concepts of fallibility, reflexivity, and
human uncertainty may point the way.]

[Dedication] For Tamiko. [Soros recently
married Tamiko Bolton.]

Preface by Anatole Kaletsky. This book consists of
late-2013 interviews of Soros conducted by a Der
Spiegel correspondent addressing what has gone wrong
with the European Union. [N]obody understands
crises better than Soros (x). He is also politically
engaged, and the originator of a philosophical view
(reflexivity) that he believes illuminates the current
financial crisis. Soros had proposed a solution to the
E.U. crisis: Germany should lead or leave the euro
(xiv). He now urges Germany to become a benign
hegemon, accepting responsibility for the
reconstruction of the European periphery (xiv)

Introduction by Gregor Peter Schmitz. The
European Union is in crisis, with the anti-European
parties attaining 30% in EU parliamentary elections
(xv-xvii). Germany had embraced the concept of
movement toward an ever-closer union, with
nation-states ultimately replaced by a European
federal state (xvii-xviii). But this is no longer the case.
In 2004 Europe seemed to represent the hope of the
future, with the U.S. mired in Iraq and Afghanistan
and the European economy booming, the euro
flourishing, and Germany the worlds top exporter
(xviii-xx). These conversations address four key
questions: (1) Does the E.U. still live up to its
founding ideals? (2) What caused the euro crisis? (3)
How do politics and the market now interact? (4) In
which direction is the E.U. headed? (xx-xxii). In a
situation in which plausible intermediaries are few,
George Soros has rare qualifications (xxii-xxvi).
Soros is critical of Angela Merkels temporizing
strategy (xxvi). Because of his activity as a speculator,
many view Soros with suspicion, but vulnerability to
speculation is not the fundamental problem of the
E.U., it is only a consequence of its structural
problems; moreover, Soros has never speculated
against the euro during the crisis (xxviii; xxvi-xxviii).
Ultimately, this book is an appeal to Germany (and
Angela Merkel specifically) to become the architect of
Europe (xxix-xxx). We hope this book will
encourage its readers to bet on Europe (xxx).


First Interview: History. Memories and lessons
from coming of age in Budapest during World War
II; the influence of a wise father (3-10). The
Marshall Plan led to the European Union and was
the result of American disinterestedness (10). The
European Union is in my view the shining example of
an open and free society (12). In 1989 Germany
could be reunited only in the context of a united
Europe . . . and the French political establishment . . .
were pretty unanimous in recognizing that France had
no chance to remain a world power without being
closely associated with Germany, because Germany
could expand eastward but France could not expand
southward. So its those two motivations that gave
the impetus to a greatly accelerated process of
European integration (12-13). Germany [today]
does not want to dominate Europe, but the
willingness to make sacrifices has disappeared (13).
Because of the globalization of financial markets,
[the financial crisis of 2007-2008] actually caused
greater losses for the European financial institutions
than for the Americans because the unsound, toxic,
and synthetic instruments had found a better market
in Europe than in America (15). In Europe the
prospect is for long-lasting stagnation. . . . Europe . . .
is in a state of economic and political disintegration.
. . . this dismal prospect is portrayed as inevitable,
although it could easily be escaped (20). All you
have to do is recognize that the rules that govern the
euro are no longer appropriate and need to be
changed (21). Either Germany should become a
benevolent imperial power in Europe, or it should
leave the euro, causing it to depreciate, enabling the
debtor countries to regain their competitiveness (21,
summarized later as Lead or Leave [43], preferably
the first [49], but Soros abandoned this position after
the banking union and the 2013 German elections
[96]). Either alternative would be preferable, even
for Germany, than to continue on the current course.
But that is not how Germany sees it (22). The
European authorities are forcing all those who find
current policies intolerable into anti-European and
anti-German attitudes (22). The euro must be
regarded as a means to an end (23). Only
Germany can end the nightmare that afflicts Europe

Second Interview: Tragedy. Soros argues that
German policy is both morally flawed (because it fails
to accord solidarity to E.U. members) and
intellectually incoherent (because it pretends that
every country should have a trade surplus, which is
mathematically impossible) (25-30). The Maastricht
Treaty needs a general overhaul (35). Germany
needs to cancel half of Greeces debt, and reschedule
the rest over a very long period, as was done for
Germany in 1953 (36). German politicians listen to
Soros [n]ot at all (36). Most Germans fail to
distinguish between loans and guarantees, and
exaggerate what Germany has had to pay (39).
Germany thinks it is showing good leadership by
preventing a breakup of the euro and by insisting on
stricter fiscal discipline. But in fact, it is not living up
to its responsibilities by opposing the introduction of
eurobonds (40). [B]ecause of the painful memory
of Hitler [Germany] is in denial and is unwilling to
live up to its responsibilities and, yes, the liabilities
that go with being an imperial power (41). If Soross
advice were followed, France would become the
natural leader of the Latin Europe and would
reassert itself as a great power. Britain could also
resume its historic role as the arbiter between two
continental blocks (46). The austerity policy pushed
by Germany could work in the long run, but in the
long run it will kill the European Union (50).
[O]nly Germany can end the nightmare (53).

Third Interview: Markets. If people start to
believe in [the efficient market hypothesis], then
economic fundamentals start to move in response to
market prices, as well as the other way around. This
is the process I call reflexivity, and it is one of the
most important driving forces of financial markets
and the world economy (62). In financial markets,
prices are a matter of anticipation, not information
(64). Credit default swaps as an example of the
danger of reflexivity (61-66). [F]inancial markets
dont reflect reality but help create their own distorted
reality (67). For about a year after the Lehman
bankruptcy [September 2008], interest rate
differentials remained unrealistically low because the
European Central Bank was still discounting
government bonds on equal terms, so that the
markets erred on the side of optimism. Then came
the Greek shock, when the markets realized that
Greece could actually default. Suddenly, the markets
imposed very severe risk premiums on all heavily
indebted countries, which therefore no longer had the
fiscal strength to support their banksand that was
really the onset of the euro crisis (67). The influence
of Karl Popper (69-70). The EU should have used
the financial crisis as the moment to take the next
step forward toward fiscal and political union, but the
political will was lacking (73). SCHMITZ: Are you
saying that the crisis was caused by following the
Maastricht rules? SOROS: That is the tragedy of
Europe: the European Union is now endangered by
too much respect for the rule of law. . . . laws are
fallible, like all human constructs (74). The very
prestigious institutions on Wall Street pursue their
self-interest without regard to the common interest. I
have sympathy with the public anger, and with
movements such as Occupy Wall Street, because
many ordinary citizens are victims of Wall Street
(79). There is very little difference between
speculation and investment (84). There is no
substitute for being at risk to sharpen your vision


Fourth Interview: Future. [T]he euro is here to
stay, and the arrangements that evolved in response
to the crisis have become established as the new order
governing the eurozone. This confirms my worst
fears. Its the nightmare Ive been talking about, and
there is little chance well wake up soon (93). There
is widespread agreement among all financial
institutions and experts, with the conspicuous
exception of Germany, that the eurozone is
threatened by deflation . . . I expect the process of
disintegration to gather momentum. . . . I expect a
series of political rather than financial crises, although
the latter cannot be excluded (94, emphasis in
original). In banking, the recreation of national
silos is dangerous because of the incestuous
relationship between national authorities and bank
managements. France in particular is famous for its
inspecteurs de finance, who end up running its major
banks. . . . the proposed banking union should have
eliminated [these relationships], but they were largely
preserved, mainly at German insistence (95). The
banking system still lacks a lender of last resort,
because of Germanys determination to limit possible
liabilities due to the actions of the European Central
Bank (ECB). I accept that Germany has succeeded
in imposing a new order on Europe, although I
consider it unacceptable. . . . So I am no longer
advocating that Germany should lead or leave the
euro. The window of opportunity . . . has closed
(96). I am giving up on changing the financial
arrangements . . . I will continue to focus on politics,
because that is where I expect dramatic
developments (97). [W]ithin the European
Parliament . . . I expect a significant anti-European
minority after the 2014 elections (97). We must
find some alternative to xenophobia. . . . I have
established an Open Society Initiative for Europe
OSIFE for short (98). [T]here is an unbridgeable
conflict between North and South on the political
asylum issue. The countries in the North, basically
the creditors, have been generous in their treatment
of asylum seekers. So all the asylum seekers want to
go there, particularly to Germany. But that is more
than they can absorb, so they have put in place a
European agreement called Dublin III, which requires
asylum seekers to register in the country where they
first enter the EU. That tends to be the South . . . So,
many prefer to remain illegal, hoping to make their
way to Germany. They are condemned to illegality
for an indefinite period. The miserable conditions in
which they live feed into the anti-immigrant
sentiment (98-99). European migration policy is
hopelessly outdated (99). We need a
comprehensive strategy designed to relieve human
suffering (100). Soross Roma Education Fund
(100-02). The danger that Britain may leave the EU
(102-03). Italy (104). France is the sick man of
Europe. It has been exempted from penal risk
premiums on account of its close association with
Germany; nevertheless, its economic performance is
inferior to that of Italy and Spain. Its a very
depressing atmosphere in Paris. There is a mood of
despondency. That will benefit Marine Le Pen, who
is a more skillful politician than her father (104-05).
[Hollande] became an obedient junior partner [of
Angela Merkel] (105). Ukraine (106-09). Russia
(109-12). There are a growing number of
unresolved political crises in the world. That is a
symptom of a breakdown in global governance
(112). President Bush destroyed American
supremacy in no time. The neocons dream of a new
American century lasted less than ten years. So did
Hitlers 1,000-year Reich (113). The world is now
full of hegemonic powers that are unwilling to accept
the responsibilities and liabilities that go with soft
power (114). Syria (115-16). Iran (116). Palestine
(116-117). China (117-22). Americas Asian pivot
(122). Edward Snowden (123-24). Actually, I would
be happy to have [Snowden] work for my foundation
as an adviser (124). I really do want to influence
history. I have always harbored an exaggerated view
of my self-importance (125; he actually means
importance, not self-importance). I like my
persona. It is my creation and I am proud of it. . . .
For some reason, I used to be ashamed of myself, but
I have simply grown out of that. I also used to be
very isolated, and now I am very involved. So when
all is said and done, being a public person has made
me a happier private person (125).

Appendix: Fallibility, Reflexivity, and the Human
Uncertainty Principle. Published in the January
2014 special number of the Journal of Economic
Methodology on reflexivity. Introduction (127-30).
My conceptual framework is built on two relatively
simple propositions. The first is that in situations that
have thinking participants, the participants view of
the world never perfectly corresponds to the actual
state of affairs. . . . That is the principle of fallibility
(130-31). The second proposition is that these
imperfect views can influence the situation to which
they relate through the actions of the participants. . . .
That is the principle of reflexivity (131). I lump the
two concepts as the human uncertainty principle (131).
Recent advances in brain science have begun to
provide some insight into the how the brain
functions, and they have substantiated David Humes
insight that reason is the slave of passion. . . . Brain
science adds many new insights to my contention that
our understanding of the world in which we live is
inherently imperfect (132). Thinking participants
have a cognitive function helping them understand the
world, and a manipulative function allowing them to
attempt to alter the world; both are subject to
fallibility, and they interfere with each other (133;
another formulation: Humans are thinking agents
and their thinking serves two functions: cognitive and
manipulative [150]). Reflexive statements (e.g. I
love you) lack an independent criterion of truth
(134). Reflexivity has affinities to the paradoxes of
self-referential statement; Bertrand Russell analyzed
the Liars Paradox in a timeless fashion. But reflexive
systems are dynamic and unfold over time. . . . Once
time is introduced, reflexivity creates indeterminacy
rather than paradox. (135). I propose
distinguishing between the objective and subjective
aspects of reality. . . . There is only one objective
reality, but there are as many different subjective
views as there are thinking participants (136-37). We
may distinguish between reflexive relations (marriage,
politics) and reflexive events (the fiscal cliff, the euro
crisis) (137); we may even speak in exceptional cases
of self-reflexivity (139). Frank H. Knight distinguished
between risk (where probabilities are known) and
uncertainty (where they are not); reflexivity is one of
the sources of fallibility that introduce uncertainty
into human affairs (139-40; Soros presents as
equivalent the expressions the human uncertainty
principle and Knightian uncertainty [150]).
Soross human uncertainty principle is much more
specific and stringent than Cartesian doubt because
it gives us objective reasons to believe that the
theories held by the participants, as distinct from
statements of specific facts, are liable to be biased or
incomplete, or both (141). Soros doubts that natural
and social science can be unifiedPopper could have
extended his critique of Marxism and psychoanalysis
to economic theory (141-49). Since social theories
also serve a manipulative function, they can be used
to influence realityfor a while (151). I propose
renouncing Poppers doctrine of the unity of science
and recognizing a fundamental difference between
natural and social phenomenanot as an empirical
truth but as a methodological convention. The
convention asserts that social science cannot be
expected to produce results comparable to physics by
using the same methods; however, it sets no limits on
what social science may be able to accomplish by
employing different methods. The convention will
protect scientific method by preventing the social
sciences from parading with borrowed feathers. It
should not be taken, however, as a demotion or
devaluation of social science. On the contrary, it
should open up new vistas by liberating social science
from the slavish imitation of natural science and
protecting it from being judged by the wrong
standards (152; Soros has had second thoughts on
this, and now argues that we ought to redefine
scientific method so that it is not confined to
Poppers model [155n.]). Consider financial markets
as a laboratory for these ideas (155). Prices [of
financial assets] reflect market participants
expectations of future market prices (156).
Whereas economics views equilibrium as the normal,
indeed necessary state of affairs, I view such periods
of stability as exceptional (157). Discussion of the
superbubble (159-63) and the euro crisis (163-66) as
examples of far-from-equilibrium situations (166).
Reflexivity has been largely neglected until recently
because it connects different fields studied by
different disciplines (168). There is an urgent need
for a new paradigm; Soross success as an investor is
an indication that his model is superior to the existing
paradigm (168-69). But Soros considers his approach
to be still very rudimentary (171).

About the Author. George Soros is chairman of
Soros Fund Management and the founder of a
network of foundations supporting open societies.
He was born in Budapest and lives in New York City.
Gregor Peter Schmitz is a Der Spiegel journalist. He
holds degrees from Munich Univ., Sciences-Po,
Cambridge Univ., and Harvard.

[Additional information. George Soros was born
Gyrgy Schwartz (the family changed its name to
Soros in 1936; in Hungarian, soros means next in line,
and in Esperanto it means will soar) on Aug. 12,
1930, into a middle-class Jewish family in Budapest.
He learned Esperanto from his mother. He moved to
the U.K. in 1947 and earned a B.Sc. (1951) and a
Ph.D. in Philosophy (1954) at the London School of
Economics, where he studied with Karl Popper. He
obtained an entry-level post at Singer & Friedlander
in London, then came to New York City in 1956,
where he was an arbitrage trader for F.M. Mayer, then
an analyst for Wertheim & Co., developing a theory
of reflexivity as it affected markets. He became
vice president at Arnhold and S. Bleichroeder. In
1967 he began to run an offshore investment fund
(First Eagle Funds) and, in 1969, a hedge fund
(Double Eagle). In 1970 he founded Soros Fund
Management. In 1973 he founded the Quantum
Fund with Jim Rogers, which has made more than
$40 billion. Soros specialized in currency speculation;
on Black Wednesday (Sept. 16, 1992), Soros made
more than $1 billion by shorting the pound sterling.
He was convicted in 2005 of insider trading in France
in 1988; though he protested his innocence, the ruling
was upheld by French and European courts. He has
given billions to liberal causes, and $23.6 million to
the effort to defeat George W. Bush in 2004. In 2006
he said that the main obstacle to a stable and just
world order is the United States and By declaring a
war on terror after September 11, we set the wrong
agenda for the world. He has expressed opposition
to many aspects of globalization. In 2012 his net
worth was estimated at $20 billion. Soros has been
married three times and has five children.]

[Critique. Soros presents his provocative ideas
without false modesty but also without hubris. The
focus is on public events but Soros speaks candidly
about himself from time to time. He regards the
German public as his chief audience, and his book
was published with a different title in Germany
(without the appendix, but with a recommended
reading list absent from the English-language edition)
as Wetten auf Europa: Warum Deutschland den Euro retten
muss, um sich selbst zu retten [Betting on Europe: Why
Germany must save the euro in order to save itself]
(Random House & SPIEGEL, February 2014) a
month before its American publication. (Curiously,
neither edition indicates whether English or German
is the original language.) It is interesting that
Soross analysis of the E.U.s current crisis agrees in
many points with far-left critiques; Soros, however,
sees the German domination that he recognizes as the
new status quo as an unintentional side effect while
the left tends to see it as a deliberate policy; indeed,
he urges Germany to embrace the hegemonic role
that the left already attributes to it. Soross article,
Fallibility, Reflexivity, and the Human Uncertainty
Principle, is not technical and should be accessible to
the average educated reader.]