In a new Project Syndicate article, Mr. Soros argues that his previous proposal that the EU should issue perpetual bonds is now impossible because of a lack of faith among investors that the EU will survive.
Individual EU member states should issue perpetual bonds, according to a new proposal by financier and philanthropist George Soros.
In a new article, An Effective Response to Europe’s Fiscal Paralysis, on the Project Syndicate opinion website, Mr. Soros concedes that his previous proposal that the EU should issue perpetual bonds would now be “impossible” because investors would only buy them from an “entity they believe will continue to exist for the foreseeable future”, which is “sadly not true of the EU today”.
Unlike the EU, the continued existence of member states would be “readily accepted by long-term investors such as life-insurance companies”.
The EU, he claims, is “too divided” – as demonstrated by Hungary and Poland’s recent veto of the next EU budget and COVID-19 recovery fund. In addition, the so-called Frugal Five (Austria, Denmark, Germany, the Netherlands and Sweden) are “more interested in saving money than in contributing to the common good”.
Mr. Soros argues that perpetual bonds offer the great advantage that the principal never has to be repaid; only the annual interest is due. The discounted present value of future interest payments “diminishes over time – it will approach, but never reach, zero”.
These instruments “would largely solve Europe’s financial problems” since financial resources – such as the €1.8 trillion currently planned – “would go several times further if it were used to issue perpetual bonds rather than ordinary bonds.”
If one country issued perpetual bonds, it would have the “additional advantage that other European countries would find it an example worth following”. The Frugal Five should find perpetual bonds “particularly attractive”, since these are countries that “like to save money”
Italy, Mr. Soros writes, needs the benefits from perpetual bonds more than other countries, but “is not fortunate enough” to be able to issue them in its own name. It would be a “wonderful gesture of solidarity”, he argues, if countries that sell perpetual bonds in their own name would also guarantee an issue by Italy.
Such a gesture would “strengthen the EU” and “benefit them indirectly”, until, eventually, the EU “could grow strong enough to issue perpetual bonds in its own name”. As the EU’s third largest economy, Mr. Soros asks: “Where would the EU be without Italy?”.
Perpetual bonds are likely to be popular with insurance companies and long-term investors since “there is a lot of unsatisfied demand in Europe” for long-term bonds. Though “at first” they may demand a premium for perpetual bonds, because they are not familiar with the instrument, this is likely to disappear as they acquaint themselves with it.
Mr. Soros also discusses the “very difficult situation” in which the EU finds itself, experiencing a second wave of COVID when “member states used most of their financial resources fighting the first wave”. Providing health care and resuscitating the economy will require much more than the €1.8 trillion ($2.2 trillion) earmarked in the new Next Generation EU budget and recovery fund, he argues.
Mr. Soros attributes Hungary’s veto of the EU budget and COVID-19 recovery fund to Prime Minister Viktor Orbán’s concerns that the EU’s new rule-of-law provision would “impose practical limits on his personal and political corruption”: “He [Orbán] is so worried that he has concluded a binding cooperation agreement with Poland, dragging that country down with him”.
However, according to Mr. Soros, that there is an “easy way” to overcome the veto of Hungary and Poland, which has delayed funding, through employing the “enhanced cooperation” procedure. This was introduced in the Lisbon Treaty to “provide a legal basis for further eurozone integration”.
Though it was never used for that purpose it can be used for “fiscal purposes”. It allows a “sub-group of member states” to set a budget and agree on a way to fund it – such as through a “joint bond”.
—George Soros is Chairman of Soros Fund Management and the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of The Alchemy of Finance, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means, and, most recently, In Defense of Open Society.
For further details contact Michael Vachon at Soros Fund Management on [email protected]