Davos forum 2011: Soros warns euro crisis could divide Europe

Billionaire financier George Soros warned Wednesday that Europe could potentially fall apart because of the "two-speed Europe" of haves and have-nots that is being perpetuated by the reform of the embattled euro.

He told a news briefing on the sidelines of the World Economic Forum that the currency used by 17 EU nations is in the process of reform, following concerns over the debt crisis that enveloped Greece and Ireland and is threatening others.

Its flaw, he said, of having a common central bank but no common treasury was being addressed with the creation of a permanent European Financial Stability Facility, which was created to bail out debt-ridden countries.

But Soros said the reforms are not addressing the euro's real problem - that the currency has divided the richer EU countries from the poorer ones.

"The euro was supposed to bring about convergence, and effectively it created divergence and that is now being perpetuated," he said. "So you are going forward with this new structure. You're going to have a two-speed Europe, and that is going to be politically very disruptive."

"That is the unsolved problem that I think needs to be recognised and some solution found because otherwise, I think the euro is clearly here to stay. There's a clear commitment to the euro. But it could put into motion this very divisive political force of two Europes," Soros warned.

"Europe potentially could fall apart because of this two-speed Europe, so it needs a solution," he said.

Soros said countries in surplus ought to be investing and expanding more in poorer European countries, but he said Germany, Europe's largest economy, can't do it because of very strict constitutional limits.

He called for a Europe-wide stimulus that can spur growth in countries that are lagging economically.

He noted that "there's a big push now on continental Europe for a financial transaction tax" which could possibly be used to help these countries, as well as for other activities like fighting climate change.

Britain, which is neck and neck with France for the second-largest economy in the 27-member EU, but not part of the euro zone, has embarked on a major austerity programme to cut government  spending aimed at putting it on sounder economic footing.

"I
think they may be right in embarking on it," Soros said, when asked
about the measures introduced by the coalition government led by Prime
Minister David Cameron.

"But
I think they will probably have the sense that they'll have to modify
it when the effects are felt," he said, "because I don't think they can
possibly be implemented without pushing the economy into a recession."

Soros
said the initial reaction has been "very positive" and the world will
be watching to see what happens, "but my expectation is that it will
prove to be unsustainable".

As
for the broader global economy following the 2008 economic crisis,
Soros said, "I think there was a serious danger of a deflationary trap
of debt with deflation reinforcing each other, the burden of debt and
prices falling."

"This has been successfully fought off, and the balance is now tipping the other way," he said.

- AP