George Soros advice for the euro zone Europeans could use a little cheering up this week.

One man who is trying to do that is George Soros. He knows his way around a currency crisis, of course, and he isnt usually accused of eing a !ollyanna. Soros thinks it is not too late to save Europe and the euro " ut he warns that time is running out and that Europes leaders must fundamentally change their strategy to succeed. #ets start with the ad news. $%ight now, the crisis has hit a new high, ecause theres an unresolved government crisis in Greece and in &taly,' Soros said. $(here is also a looming worsening of the financial crisis, ecause all the efforts to leverage the E.).S.). have run into legal or technical difficulties.' He was referring to the

European )inancial Sta ility )acility, the ailout fund for the euro zone. $(hat means that currently Europe has no ring fence against a possi le Greek default, and that is what is pushing the market into a renewed panic,' he said. $& e*pect the market to fall into despair and panic and & e*pect that to get worse.' +espair may indeed e the right emotion, if you accept Soross prediction of what will happen if European leaders dont get ahead of the markets, $(his crisis is potentially igger than the crash of -../, ecause we have survived the crash of -../ and we have not yet survived this one. (here is a danger if they get it wrong then you have a financial meltdown. &f there is a disorderly default in Greece, and the rest of the euro zone has not

een insulated from contagion, then you could have a meltdown not only of the Greek financial system, ut of the European and in fact the glo al financial system ecause we are so interconnected.' So far, so dire. 0ut Soros has two ideas that should perk you up. One is a out the azooka, and one is a out the most important woman in the world. (he azooka is the financial weapon Europe has created to defend ailing European economies from the skeptical traders who are etting against them. (o end the crisis, Europe needs a azooka ig enough to convince the markets that making a wager against )rankfurt will e futile " and e*pensive.

1ntil now, the story of this financial crisis is one of European leaders consistently eing one step ehind the markets, ringing a fist to a knife fight, then a knife to the gun fight " and never ringing out the azooka. 2onventional wisdom " and the verdict of the markets this week " is that the European )inancial Sta ility )acility war chest of 344. illion, or 56.. illion, is a continuation of this pattern of insufficiency. Soros disagrees, $&t actually has the azooka in its hand, provided it uses it in the right way.' (o do that, Soros said, Europe must first acknowledge what its azooka is too small to achieve, rescue Europes faltering mem ers directly. (he ailout fund, he said, $was designed as a way of providing

guarantees on government onds, ut for that purpose it is clearly inade7uate. &t cannot e stretched to cover &taly and Spain.' 0ut the ailout fund is ig enough, Soros thinks, to save Europe in a different way. $&t needs to e used to guarantee the anking system,' he said . $(hat would create a lender of last resort, which is currently lacking.' (he ailout fund, he continued, could take the solvency risk, which is eyond the legal right of the European 2entral 0ank. $8nd for that,' he said, $there is plenty of money.' (hus shored up, the anks would e a le to uy the high9yielding government de t of the European countries that are currently struggling to find lenders.

0anks would e encouraged to hold their li7uidity in (reasury ills, Soros said, which they could sell to the European 2entral 0ank at any moment. $So it is the e7uivalent of cash, and it would yield more than cash, therefore they would hold it,' Soros said. $(hat would allow countries like &taly and Spain during this crisis period to orrow at negligi le cost.' His plan, Soros said, would make &talys de t $sustaina le, ecause the E.2.0. has any amount of money for the purpose of providing li7uidity. 8t the same time, it would not violate the law against the E.2.0. directly financing the governments.' Soross plan is essentially a way to get around Europes fundamental economic flaw

" it has a single currency, ut no lender of last resort, $&ts a trick, ut a trick that would work.' (he European crisis has metastasized ecause Germany has een adamant a out locking precisely this sort of trick. (he second reason for Soross relative optimism is his conviction that Germany and its leader, 2hancellor 8ngela :erkel " the aforementioned most important woman in the world " have recently had a crucial change of heart. $&t is entirely in the hands of Germany,' Soros said. $8ngela :erkels attitude has changed. She recognizes that the euro is in mortal danger and she is willing to risk her political future to save it. & think she recognizes that Germany has caused the

crisis to get out of control, and she is now determined to correct that.' :erkel is very good at getting what she wants, so fans of Europe and the euro should e somewhat reassured y Soross verdict. 0ut only somewhat. Soros is a persuasive salesman of his plan to rescue Europe, ut his most telling remark comes when & ask him what he would do if he were still actively trading. $& would e sitting on the fence like every ody else, ecause the situation is so uncertain.'

999999999999999999999999999999999999999999999999999999999999999999999999 9999999999999999999999 :y seven point plan to save the eurozone

;< :em er states of the eurozone agree on the need for a new treaty creating a common treasury in due course. (hey appeal to European 2entral 0ank to co9operate with the European financial sta ility facility in dealing with the financial crisis in the interim 9 the E20 to provide li7uidity= the E)S) to accept the solvency risks.

-< 8ccordingly, the E)S) takes over the Greek onds held y the E20 and the &nternational :onetary )und. (his will re9esta lish co9operation etween the E20 and eurozone governments and allow a meaningful voluntary reduction in the Greek de t with E)S) participation.

>< (he E)S) is then used to guarantee the anking system, not government onds. %ecapitalisation is postponed ut it will still e on a national asis when it occurs. (his is in accordance with the German position and more helpful to )rance than immediate recapitalisation.

4< &n return for the guarantee ig anks agree to take instructions from the E20 acting on ehalf of governments. (hose who refuse are denied access to the discount window of the E20.

?< (he E20 instructs anks to maintain credit lines and loan portfolios while installing inspectors to control risks anks take for their own account. (his removes one of the main sources of the current credit crunch and reassures financial markets.

6< (o deal with the other ma@or pro lem 9 the ina ility of some governments to orrow at reasona le interest rates 9 the E20 lowers the discount rate, encourages these governments to issue treasury ills and encourages the anks to keep their li7uidity in the form of these ills instead of deposits at the E20. 8ny E20 purchases are sterilised y the E20 issuing its own ills. (he solvency risk is guaranteed y the E)S). (he E20 stops open market purchases. 8ll this ena les countries such as &taly to orrow short9term at very low cost while the E20 is not lending to the governments and not printing money. (he creditor countries can indirectly impose discipline on &taly y controlling how much %ome can orrow in this way.

A< :arkets will e impressed y the fact that the authorities are united and have sufficient funds at their disposal. Soon &taly will e a le to orrow in the market at reasona le rates. 0anks can e recapitalised and the eurozone mem er states can agree on a common fiscal policy in a calmer atmosphere.

Source, )inancial (imes