ECB’s First Chief Economist Warns – The EU is a ‘House of Cards’

None of the following about the EU will come as a surprise to most of you, but the language used by Otmar Issing is nevertheless pretty remarkable.

The Telegraph reports:

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned.

“One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist and a towering figure in the construction of the single currency.

Prof Issing said the euro has been betrayed by politics, lamenting that the experiment went wrong from the beginning and has since degenerated into a fiscal free-for-all that once again masks the festering pathologies.

“Realistically, it will be a case of muddling through, struggling from one crisis to the next. It is difficult to forecast how long this will continue for, but it cannot go on endlessly,” he told the journal Central Banking in a remarkable deconstruction of the project.

The regime is almost certain to be tested again in the next global downturn, this time starting with higher levels of debt and unemployment, and greater political fatigue.

Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said.  

The ECB has “crossed the Rubicon” and is now in an untenable position, trying to reconcile conflicting roles as banking regulator, Troika enforcer in rescue missions and agent of monetary policy. Its own financial integrity is increasingly in jeopardy.

The central bank already holds over €1 trillion of bonds bought at “artificially low” or negative yields, implying huge paper losses once interest rates rise again. “An exit from the QE policy is more and more difficult, as the consequences potentially could be disastrous,” he said.

“The decline in the quality of eligible collateral is a grave problem. The ECB is now buying corporate bonds that are close to junk, and the haircuts can barely deal with a one-notch credit downgrade. The reputational risk of such actions by a central bank would have been unthinkable in the past,” he said.

Prof Issing slammed the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all. The Greeks should have been offered generous support, but only after it had restored exchange rate viability by returning to the drachma.

Indeed, as I highlighted in last year’s post: German Study Proves It – 95% of Greek “Bailout” Money Went to the Banks.

Jacques Delors, the euro’s “political” founding father, issued his own candid post-mortem last month on the failings of EMU but disagrees starkly with Prof Issing about the nature of the problem.

His foundation calls for a supranational economic government with debt pooling and an EU treasury, as well as expansionary policies to break out of the “vicious circle” and prevent a second Lost Decade.

The fact that some are actively considering this in the wake of all the populist movements tells on the continent, tells you just how disconnected many of these people are.

“It is essential and urgent: at some point in the future, Europe will be hit by a new economic crisis. We do not know whether this will be in six weeks, six months or six years. But in its current set-up the euro is unlikely to survive that coming crisis,” said the Delors report.

Prof Issing is not a German nationalist. He is open to the idea of a genuine United States of Europe built on proper foundations, but has warned repeatedly against trying to force the pace of integration, or to achieve federalism “by the back door“.

He decries the latest EU plan for a “fiscal entity” in the Five Presidents’ Report, fearing that such move would lead to a rogue plenipotentiary with unbridled powers over sensitive issues of national life, beyond democratic accountability.

Such a system would erode the budgetary sovereignty of the member states and violate the principle of no taxation without representation, forgetting the lessons of the English Civil War and the American Revolution.

Of course, since most EU technocrats have virtually no capacity for introspection, there’s close to a zero percent chance they’ll do the right thing. Therefore, as I laid out in the post, It’s Not Just the UK – Widespread Support for EU Referendums Seen Across the Continent, here’s how I see things playing out:

1. Euro skepticism is on the rise.
2. EU technocrats will fight back with sticks instead of carrots, furthering euro-skepticism.
3. Great Britain will be the first, but probably not the last country to hold an EU referendum over the next 5-10 years.
4. The EU as it stands is a failed experiment. This is proven by the inept and corrupt handling of both the Greek “bailout” program and the refugee crisis.
5. The only solution is to increase decentralization and restore national democracy within the framework of some of the popular attributes the EU offers.
6. EU technocrats are obsessed with a further centralization of power and will continue to push it against the will of the people.
7. The EU will ultimately disintegrate as a result of overwhelming popular dissent to technocratic scheming and incompetence.

For related articles, see:

German Study Proves It – 95% of Greek “Bailout” Money Went to the Banks

Does the Migrant Crisis Represent the End of the European Union?

Video of the Day – Here’s What Happened When a Member of European Parliament Tried to Read the TTIP Text

The EU Wants to Impose a Tax for Sharing Links on the Internet

Head of the European Parliament Warns – EU at Risk of Falling Apart

In Liberty,
Michael Krieger

Follow me on Twitter.