Parsing Soros’ comments on Europe

Yesterday, George Soros published an op-ed titled: Brexit and the Future of Europe on Project Syndicate. As Soros’ public statements tend to be

• Misquoted or taken out of context
• Misunderstood
• Even occasionally dismissed as the rabble rousing of an old man

I will document my interpretation - a parsing - of his latest comments. The purpose of this writing is for my own benefit - as a journal of sorts (so I can look back in the future to see if was right or wrong) … and to benefit anyone who has eyes and ears to learn.

And yet that was not enough to stop the United Kingdom’s electorate from voting to leave. Why? The answer could be seen in opinion polls in the months leading up to the “Brexit” referendum.

Translation: You morons completely misinterpreted or dismissed my Guardian Op-ed that I wrote days before the Brexit vote. The likelihood and risk of a Brexit were evident to those dispassionately paying attention to the ground level realities. In fact, I wrote: “My 60 years of experience tells me the pound will plummet, along with your living standards.” But you arrogant fools dismissed me as a “has-been” octagenarian. And those of you inattentive to detail ignored my explicit prognostication. You arrogant fools also ignored the fact that, like 2006-2008, this time I turned off the “auto-pilot” program running Soros Fund Management - and I switched back to manual.

Now the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible. Britain eventually may or may not be relatively better off than other countries by leaving the EU, but its economy and people stand to suffer significantly in the short to medium term. The pound plunged to its lowest level in more than three decades immediately after the vote, and financial markets worldwide are likely to remain in turmoil as the long, complicated process of political and economic divorce from the EU is negotiated. The consequences for the real economy will be comparable only to the financial crisis of 2007-2008.

Translation: The EU has been in a fragile state for several years - the 2010-2011 volatility in European sovereign debt markets were a very clear warning sign. But those EU-related concerns abated at the end of 2011 (though not fully disappearing)… in all likelihood, Brexit is the needle that will “break the camel’s back” (i.e. lead to disintegration of the EU). Contrary to the doom and gloom media headlines (and even some of my earlier rhetoric in the Guardian) claiming that this will destroy Britain’s economy, Britain’s economy may actually be relatively better off long-term by leaving the EU. The immediate consequences, however, appear negative for its economy and its people.

The odds that financial markets globally remain in turmoil exceed the odds they do not; however, like 2007-2008,  this may lead to counter-intuitive market price levels - and very violent, unpredictable paths - across all assets.

That process is sure to be fraught with further uncertainty and political risk, because what is at stake was never only some real or imaginary advantage for Britain, but the very survival of the European project. Brexit will open the floodgates for other anti-European forces within the Union. Indeed, no sooner was the referendum’s outcome announced than France’s National Front issued a call for “Frexit,” while Dutch populist Geert Wilders promoted “Nexit.”

Translation: My Guardian Op-ed may have been a bit deceiving (though not intentionally), in that my fears have always been about the risk of EU dissolution, not  fear of the UK’s future.

But the implications for Europe could be far worse. Tensions among member states have reached a breaking point, not only over refugees, but also as a result of exceptional strains between creditor and debtor countries within the eurozone. At the same time, weakened leaders in France and Germany are now squarely focused on domestic problems. In Italy, a 10% fall in the stock market following the Brexit vote clearly signals the country’s vulnerability to a full-blown banking crisis – which could well bring the populist Five Star Movement, which has just won the mayoralty in Rome, to power as early as next year.

Translation: Yes, I believe Brexit will hurt the UK’s economy in the near term. However, if Brussels has a punitive attitude/approach to Brexit (i.e. try to “make an example” of the UK for purpose of deterring other EU countries), that will actually backfire against Brussels. Case in point, Italy. Brussels, you better be careful not to treat the UK as you did Greece.

All of Europe, including Britain, would suffer from the loss of the common market and the loss of common values that the EU was designed to protect. Yet the EU truly has broken down and ceased to satisfy its citizens’ needs and aspirations. It is heading for a disorderly disintegration that will leave Europe worse off than where it would have been had the EU not been brought into existence.

Translation: Some of you conspiracists may see me as an elitist, “New order” puppetmaster, blind and callous to the plight of the masses. Actually, I am fully aware that the EU has and is not acting in the interest of most its members’ citizens. It does not make me happy at all…don’t forget I am a survivor of a far darker period in Europe’s history. I am concerned that the EU’s member nations and its citizens may end up worse off in coming years, versus the counterfactual scenario where the EU had never existed. Yes, to put it bluntly: the EU may end up a failure.

But we must not give up. Admittedly, the EU is a flawed construction. After Brexit, all of us who believe in the values and principles that the EU was designed to uphold must band together to save it by thoroughly reconstructing it. I am convinced that as the consequences of Brexit unfold in the weeks and months ahead, more and more people will join us.

Translation: Yes, the EU might prove to be a mistake. It is inherently a flawed construction. But it is still worth fighting for. I may not have specific policy prescriptions, but recall that I earlier implied that a punitive approach by Brussels will be counter-productive. That is the wrong approach. It would not be consistent with the values and principles the EU was designed to uphold.

I’m cautiously optimistic that if the aftershocks of Brexit don’t dissipate in coming weeks/months - rather, escalating(i.e., in financial markets, the real economy, and overall peace) - more people will seek to preserve/reconstruct the union, but with more conciliatory attitudes and approaches. A punitive approach by Brussels will lead to the dissolution of the EU. A conciliatory one may lead to a EU 2.0.

Additional Thoughts:

• I found a certain Vic Niederhoffer’s public heckling over Soros (few weeks ago) rather amusing and…ironic.
• Soros’ comments must be analyzed from global macro and game theoretic lenses.
• This past week is a key inflection point in attitude of the casual Soros bashing market participant - their knee jerk reactions up to now might have been to ‘fade’ (i.e. bet against) any Soros related headline (without reading/listening to his actual words). The behavior may now switch, until there is some sort of market climax/resolution.