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

By Mike Kreuger and cross-posted from Liberty Blitzkrieg

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

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