Otmar Issing frets on the bail-out

Conventional wisdom in Brussels holds that nothing helps the cause of European integration like a crisis: the battles of the exchange-rate mechanism in the 1990s led to the Euro, the 9/11 terrorist attacks to greater judicial cooperation, and now the financial meltdown is spurring an ever-stronger European response.

As Jacques Delors, former Commission president, put it in a recent speech, firefighters battling crises soon make way for architects.

Proponents of this vision would do well to read Otmar Issing’s comment piece in Tuesday’s FT.

One of the architects of the Euro, Issing was the first chief economist at the European Central Bank in 1998, and is widely seen as a thoughtful observer of all things monetary.

His warning that the latest measures taken to stave off crisis amount to “a dangerous step, and one that will end up dividing Europe” will give pause to those in Brussels who share Issing’s Europhile instincts.

Issing fundamentally likes the idea of political integration – indeed, he wanted it in place well before the Euro was launched. But he draws a line between organised integration (with a constitution, parliamentary accountability and so on), with the haphazard sort that has resulted from the response to the crisis.

Any attempt to “save” monetary union via agreements which transfer sovereignty to a European level, where violations of fundamental treaties have become a regular event, lacks any logic. In the end it will only further alienate the people from Europe itself.

Perhaps some will challenge his premise that it is basically impossible for any body at the European level to control national spending, leading to moral hazard as “core” countries lack the means to punish profligate “peripheral” countries. (The Stability and Growth Pact that was meant to limit national indebtedness failed in the early 2000s, Issing points out, and he thinks little of new measures being crafted.)

But it is hard to argue against his broader point that the increased fiscal liabilities agreed recently are a step towards a common Eurobond, the option favoured by many federalists such as Jean-Claude Juncker, head of the Eurogroup. That would be tantamount to “taxation without representation”, Issing claims. One presumes the echo of Tea Party-style ire the phrase evokes is not coincidental. Mr Issing has a keen following in his native Germany, and his past suggestions that Greece never belonged in the eurozone have struck a chord in places like Finland and the Netherlands, where scepticism around the bail-out runs deep.

To change the “no bail-out” clause ever more in the direction of a bail-out regime is not a step towards a democratically-legitimised political union. It is a move on a slippery road to a regime of fiscal indiscipline drowning hitherto solid countries in the morass of over-indebtedness.

Finally, he does little to spare his former employer, the ECB. “A monetary union with a stable euro can only survive if central bank independence is fully respected,” he writes. He is suggesting something else is afoot, clearly.

In the end, Issing suggests the current policy is not merely unattractive from a policy standpoint, it is also doomed to fail. That is not an anti-European British minister speaking, it is a founding father of the single currency with a deep attachment to the European project.