For months we have been assailed by dire warnings of economic misery following the Brexit vote. But how fares the Euro project meanwhile?  Not good.

Not good at all, according to the founding architect of European monetary union – the biggest single advance to date of the EU integration project.

According to Professor Otmar Issing (pictured), the European Central Bank’s first chief economist and a major figure in the introduction of the single currency, the European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form.

“One day, the house of cards will collapse,” he has told the journal Central Banking. In a sweeping critique of EU economic policies and the European Commission in particular, he 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”.

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.

Strangely (or not, as the case may be) Professor Issing’s remarks have not been reported by the anti-Brexit BBC which has not lost an opportunity to broadcast gloomy warnings about the UK’s economic fate and downplay the pick-up in exports, employment and consumer spending. Yesterday it carried a warning from the EY Item Club that the UK faces “a prolonged period of weakness” – but made no mention of Professor Issing’s critique.

The European Central Bank, he said, is on a “slippery slope” and has in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties. 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 Stability and Growth Pact has more or less failed. Market discipline is done away with by ECB interventions. So there is no fiscal control mechanism from markets or politics. This has all the elements to bring disaster for monetary union.

“The no bailout clause is violated every day,” 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 regime, says Issing, 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.

 “The Stability and Growth Pact has more or less failed. Market discipline is done away with by ECB interventions. So there is no fiscal control mechanism from markets or politics. This has all the elements to bring disaster for monetary union.

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.

Cloaking it all is obfuscation, political mendacity and endemic denial.  Leaders of the heavily indebted states have misled their voters with soothing bromides, falsely suggesting that some form of fiscal union or debt mutualisation is just around the corner.

Yet there is no chance of political union or the creation of an EU treasury in the forseeable future, which would in any case require a sweeping change to the German constitution – an impossible proposition in the current political climate. The European project must therefore function as a union of sovereign states, or fail.

His critique, says economics commentator Ambrose Evans-Pritchard, will exasperate those at the ECB and the International Monetary Fund who inherited the crisis, and had to deal with a fast-moving and terrifying situation.

The fear was a chain-reaction reaching Spain and Italy, detonating an uncontrollable financial collapse. This nearly happened on two occasions, and remained a risk until Berlin switched tack and agreed to let the ECB shore up the Spanish and Italian debt markets in 2012.

Jacques Delors, the euro’s “political” founding father, issued his own 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. “It is essential and urgent: at some point in the future, Europe will be hit by a new economic crisis.”

Issing decries the latest EU plan for a “fiscal entity”, 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.

His critique will chime with many in the UK who feared the EU’s constant attempts to extend its powers while cracks in the edifice have deepened. Backtracking Remainers should take note.

Be the first to write a comment.

Letters to the Editor