Wednesday, December 9, 1998 Published at 13:17 GMT
Soros backs the euro, warns on sterling
George Soror has turned from speculator to philosopher
George Soros, the international financier who has made billions through currency speculation, has backed the euro, Europe's new single currency.
He told a group of UK Members of Parliament that the euro will be a sound currency. However Mr Soros warned that the pound could face a difficult time ahead, and could vulnerable to wild fluctuations.
Mr Soros said the approach of the single currency had helped Europe become a safe haven during the world's recent financial turmoil.
Nevertheless the man who made $1bn by driving the pound out of the ERM in 1992 warned that sterling will again be in a very dangerous position.
It will be caught between two large currency zones, the dollar and the euro, and will become more volatile and more unstable. Sterling had tended to move with the dollar, but that could make it subject to speculative attack if the dollar-euro rates diverged.
Need for EU political co-operation
In the long run he argued that you could not have a common market without a common currency, but that also meant a common fiscal policy, with its greater tax harmonisation.
He admitted that there would be political strains within the eurozone, and some mechanism was needed to even out the divergences between regions.
He said that taxes on capital would have to be harmonised because otherwise money would be moved around quickly since there was no longer any currency risk.
International danger remains
He said that the economic turmoil had revealed weaknesses in the international structures, both in the International Monetary Fund and in way financial markets operate.
He said that the world came perilously close to a financial meltdown, and that revealed a flaw in the way risk was managed by financial institutions.
There needed to be stronger international regulation of the banking system, and greater disclosure by hedge funds to the financial authorities.
He said that although there were signs of recovery in the developing countries, this might be counterbalanced by the recession in the industrial world.
The stock market recovery had diminished the danger of a worldwide recession, and some countries like Korea and Thailand had taken measures to address their problems.
Mr Soros denied that there was any contradiction between his views and his role as an international speculator. He said there was no real alternative to a global capitalist system, but his object was to make it more viable.
He said that he was not necessarily in favour of fluctuating exchange rates, as there was a tendency to move to extremes, which was not desirable. He had even considered backing the proposal for a "tax on speculation," first proposed by economist James Tobin.
He said that the world was entering a period of deflation, where even monetary easing would not revive the economy - as in Japan today.
There was worldwide overcapacity and downward pressure on prices.