ECB 'a prisoner' of own bond scheme, says architect of euro
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ECB 'a prisoner' of own bond scheme, says architect of euro

The ECB has become a prisoner of politicians and markets through its commitment to buy the sovereign bonds of struggling eurozone members, Otmar Issing, one of the euro’s main architects, has told RBS.

Issing, the European Central Bank’s chief economist from 1998 to 2006, said the bank had threatened its own independence because of its desire to defuse the eurozone crisis last year. He said the ECB’s insistence that it would only assist countries it judged had met strict conditionality was problematic since it had surrendered that power to Brussels. He said politicians might find it expedient to allow a programme to continue even if structural reforms were not being pushed through as promised, leaving the ECB effectively forced to continue buying bonds for fear of triggering a crisis if they stopped.

“I understand why Mr Draghi made his announcement, but I am deeply concerned,” he said, referring to last September’s launch of the OMT programme by ECB president Mario Draghi. “The rosy scenario is that the OMT is just an announcement: a kind of nuclear weapon that’s never used”.

“But if the programme is triggered, it’s not under the control of the ECB anymore. As soon as a country is under conditionality, the ECB has to deliver.”

Warning of mission creep, Dr Issing said once the ECB started buying bonds it would be almost impossible to stop. Ending a programme would trigger a crisis that could threaten the very future of the currency union and so it would also become a prisoner of markets.

“The ECB will have staked its reputation on this programme. It could not go back,” Dr Issing told a meeting with RBS clients in Brussels. “It is easy to go beyond your mandate”.

So will the OMT be needed? Speculation that Spain would be forced to request helphas subsided in recent months precisely because markets are calmer in the knowledge that a backstop is available. The danger comes if a member state then uses that as an excuse to slow reform, thereby sapping market confidence, undermining demand for sovereigns and so pushing a country back into the arms of the ECB.

Inflation mandate secure

Issing – who was one of Angela Merkel’s economic advisors and a former Bundesbank board member – was instrumental in forging early ECB strategy, in particular the bank’s commitment to price stability. He said there was little chance this principal mandate would change, despite complaints from some exporters and national politicians that the ECB was doing little to fight a ‘currency war’ that is damaging the bloc’s competitiveness.

“Saying we are flexible on inflation, to lose that anchor would push us back into the 70s. At the moment there is no suggestion that the two per cent inflation target is going to be given up.” He noted that the ECB had to also pay attention to the danger that a weak currency could push up import prices, and therefore inflation.

The greatest danger hanging over the eurozone, he said, was that governments could lose the will to implement structural reforms in the face of popular anger. Reforms depended on courageous leadership (a return to power by Silvio Berlusconi “is frightening” he said) but ultimately depended on the backing of ordinary people.

“This is the key. If voters are not supportive, we are in deep trouble. People need to see the need for reform but also the light at the end of the tunnel. That means politicians need to better explain what they are doing and why.”

He said that most eurozone members, including Germany, had so far failed to deliver the required level of structural reform, though he praised Portugal in particular for driving through painful change.

“If this energy in reforms declines then the crisis will show up again very soon. Certainly, we are not yet out of the crisis. There is no room for complacency”.

The euro will survive despite that threat

“The question is how many members it will have in 10 years time? The answer is ‘more than now’. I am convinced. At the very least, nothing will happen before the German elections (in September)”. 

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