Euro ‘House of Cards’ to Collapse, Warns ECB Prophet
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.
Professor Issing said the euro has been betrayed by politics, that the experiment went wrong from the beginning and has since degenerated into a fiscal free-for-all that 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 said.
It is a reminder that the Eurozone has not overcome its structural incoherence. A combination of cheap oil, a cheap euro, quantitative easing and less fiscal austerity have disguised this, but the short-term effects are already fading.
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.
Professor Issing lambasted the European Commission for giving up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said.
The ECB is now buying corporate bonds that are close to junk, and the haircuts can barely deal with a one-notch credit downgrade.
Professor Issing discusses bailing out bankrupt states; the ECB’s untenable position; and the impossibility of political union or an EU Treasury. Jacques Delors, who disagrees with Professor Issing, is also quoted.