ECB prophet warned euro house of cards to collapse: Cannot go on endlessly!

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The US economy has recovered the ground lost during the pandemic. Meanwhile, China is producing more now than before the first outbreak of COVID-19. Even Britain, which had one of the worst outbreaks of the virus and facing all the headwinds from leaving the EU, is staging one of the most rapid recoveries in its history.

On the other hand, the eurozone appears once again to be the weakest link of the global economy.

According to financial columnist Matthew Lynn, it could be years before it claws back to 2019 levels of production and output.

He wrote in the Telegraph: “Growth figures last week were disappointing. True, the zone is growing, but at a far slower pace than the rest of the world.

“Overall, the zone expanded by just 2 percent in the second quarter.

“Italy was the best of its major economies, at 2.7 percent, while Germany managed to eke out 1.5 percent growth for the quarter, below expectations, and hardly making up for the 2.1 percent fall in the first three months of the year.

“Overall, the IMF expects the zone to expand by only 4.6 percent in 2021, after a 6.5 percent fall last year.

“When will it get back to its pre-pandemic level of production? No one really knows. At the current rate, it will be a while.”

As many fear the gloomy outlook could mean the end of the eurozone in the near future, a warning the founding architect of the monetary union has resurfaced.

In 2016, Professor Otmar Issing, the European Central Bank (ECB)’s first chief economist and a towering figure in the construction of the single currency, claimed the whole euro project is unworkable in its current form.

He said: “One day, the house of cards will collapse.”

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

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He told the journal Central Banking: “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 also branded the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way.

He concluded: “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.”

Former President of the European Commission and one of the main architects of the euro Jacques Delors echoed Prof Issing’s claims in an interview with the Daily Telegraph in 2011.

Mr Delors argued the errors made when the euro was created had effectively doomed the single currency to the debt crisis.

He said the lack of central powers to coordinate economic policies allowed countries, such as Italy and Greece, to run up unsustainable debt.

He also stated the debt crisis did not stem from the single currency itself, but from a “fault in execution” by political leaders who chose to turn a blind eye to the fundamental weaknesses and imbalances of member states’ economies.

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The now 95-year-old Frenchman said: “The finance ministers did not want to see anything disagreeable which they would be forced to deal with.”

Mr Delors insisted that all European member states should share the blame for the 2009 crisis.

He said: ”Everyone must examine their consciences.”

Commenting on Britain, who objected to euro membership claiming the currency could not work without a state, Mr Delors added: “They had a point.”

He also noted the reaction of EU leaders had been “too little, too late”.

In particular, Mr Delors identified “a combination of the stubbornness of the Germanic idea of monetary control and the absence of a clear vision from all the other countries”.

In the late Eighties, Mr Delors’ plan was indeed received with high levels of scepticism by Britain and, in 1990, Margaret Thatcher’s Government proposed an alternative to the French politician’s full monetary union.

According to a BBC report of the time, then Chancellor of the Exchequer John Major announced the plan in a speech to German businessmen.

It was envisaged that the currency, called the Hard ECU, would be used initially by businesses and tourists and managed by a new European Monetary Fund (EMF).

According to a 2015 report by economist at Capital Economics, John Phelan, the Hard ECU would have been “less economically and politically” damaging than the euro.

The economist argued several eurozone countries desperately need the tool of devaluation that the euro denies them.

He said: “The Hard ECU would have allowed them this tool until such time as they no longer needed it. If that time didn’t come, then they should not have joined the single currency.

“Politically, by giving democratically accountable domestic policymakers the ‘greater policy space’ offered by devaluation, the Hard ECU would have generated less of the resentment that the euro currently fuels.”

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