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<ul class="summary-list"><li><keyword id="13604750" type="UNKNOWN" weightage="60" keywordseo="otmar-issing" source="Orion">Otmar Issing</keyword> said the <keyword id="12061141" type="UNKNOWN" weightage="60" keywordseo="european-central-bank" source="Orion">European Central Bank</keyword>'s slow response to <keyword id="11894140" type="UNKNOWN" weightage="60" keywordseo="inflation" source="Orion">inflation</keyword> posed a risk to growth, in an interview with the FT.</li><li>One of the <keyword id="6431122" type="UNKNOWN" weightage="60" keywordseo="euro" source="Orion">euro</keyword>'s founding fathers, he said the ECB had "lived in a fantasy" and downplayed the risk of rising prices.</li></ul><p>One of the founding fathers of the euro believes the European Central Bank has been far too slow in responding to inflation and risks tilting the single currency bloc into "<keyword id="12084044" type="UNKNOWN" weightage="60" keywordseo="stagflation" source="Orion">stagflation</keyword>", where prices continue to rise, while growth slows.</p><p>Otmar Issing, who was also the ECB's first chief economist in 1998, rebuked the central bank for downplaying the risk of soaring inflation and not tightening monetary policy fast enough to deal with it. <br /><br />"The ECB lived in the fantasy of continuing this policy without any negative consequences," he told <a href="https://www.ft.com/content/145b6795-2d21-48c6-984b-4b05d121ba16?accessToken=zwAAAYAeH58okc8UW2eVLSFIxtOYS0sF0SG6Fg.MEQCIFFCI5ceg1XjJKOGJYsB2RDx0-ctXdTmmq8H1s-esyTFAiBGlbzQTFTW8YAcSQ-pyMfVc9eT5LpUh0srD8UCvQpQeg&amp;sharetype=gift?token=97f75c1d-d27b-4c78-ab3c-3d59c6f1f353">the Financial Times</a> in an interview. "They would be in a better, or at least a less bad, situation if they had started to normalize policy before, the war should not distract from this fact."</p><p>Issing said the ECB had misjudged the factors that have caused the surge in inflation."The ECB has contributed massively to this trap in which it is now caught because we are heading towards the risk of a stagflationary environment," Issing said. </p><p><a href="https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area">Annual eurozone inflation</a> jumped to record highs of 7.5% in March, up from 5.9% the month before. Skyrocketing energy prices contributed significantly to inflation, as Russia's war with Ukraine sent commodity prices soaring.</p><p>The ECB will hold its next policy meeting on Thursday and has signaled it is concerned about inflation, but economists said the threat to economic growth and rising energy prices and the uncertainty around the impact of the Russia-Ukraine war might affect how aggressive it is in tightening monetary policy.</p><p>"The risk is that the ECB will probably not validate the July pricing of a potential rate hike just yet because of uncertainty over the growth impact from the Russia-Ukraine conflict," Jordan Rochester, a currency strategist at Nomura, said.</p><p>The ECB maintains a target rate of 2% for consumer inflation, but has struggled since the sovereign debt crisis to achieve it.</p><p>Issing said the ECB's forecasting model for inflation was outdated given the current situation and was based on the past and cyclical experience. "You need a much broader approach to explaining inflation in a time of structural changes. If you have a misdiagnosis, of course, you have a misguided policy," he told the FT.</p><p>He said the ECB had been too slow to rein in its ultra-loose monetary policy. Other central banks like the US Federal Reserve and the Bank of England have already raised rates to tackle inflation, however the ECB will scale back its monthly asset purchases faster.</p><p>"It is obvious the ECB is late to react, while the Fed might be even more behind the curve," Issing said.</p><p>"Inflation was a sleeping dragon; this dragon has now awoken," he said.</p>

One of the euro's founding fathers says the ECB is 'living in a fantasy' by getting tough enough on inflation

<p><div class="KonaFilter image-container display-table float_right click-to-enlarge"><div><div class="image on-image"><a title_source="REUTERS/Alex Domanski" title_caption="Otmar Issing with his new book " Wie="" wir="" den="" Euro="" retten="" und="" Europa="" staerken="" How="" we="" save="" the="" euro="" and="" strengthen="" Europe="" in="" class="zoomin" href="https://static-ssl.businessinsider.com/image/5804e8e2dd0895f8488b45c9-960/rtr36i67.jpg"><span class="sprites click-to-enlarge-icon" title="Click to enlarge"></span></a><p class="source"><span>REUTERS/Alex Domanski</span></p><p class="caption">Otmar Issing with his new book "Wie wir den Euro retten und Europa staerken" (How we save the euro and strengthen Europe), in 2012.</p></div><p></p></div></div>Otmar Issing, a founding member of the executive board of the European Central Bank, gave an extraordinary interview to a finance journal in which he said <a href="http://www.centralbanking.com/central-banking-journal/interview/2473842/otmar-issing-on-why-the-euro-house-of-cards-is-set-to-collapse">"the house of cards will collapse"</a> when asked about the future of the ECB and the euro.</p><p>The statement is surprising because Issing is widely regarded as the architect of the euro. He is a former board member of the Deutsche Bundesbank who joined the ECB in 1998 specifically to create the EU currency.</p><p><a href="http://www.telegraph.co.uk/finance/financialcrisis/9462381/Euro-founder-admits-some-nations-may-be-forced-to-leave.html">He has previously argued that the euro is worth saving</a> but that some nations (Greece, most obviously) may have to leave the eurozone to ensure its survival. So his more recent comments are more harsh than he has been in the past.</p><p><a href="http://www.centralbanking.com/central-banking-journal/interview/2473842/otmar-issing-on-why-the-euro-house-of-cards-is-set-to-collapse">Issing's statement appeared in Central Banking journal</a>, as part of a lengthy discussion about the independence of the ECB. He was asked whether the central bank was too cooperative with the politicians and governments who rely on it, and whether it had bought too much low-quality debt in its efforts to underpin the European economy. <a href="http://www.centralbanking.com/central-banking-journal/interview/2473842/otmar-issing-on-why-the-euro-house-of-cards-is-set-to-collapse">He argued that the ECB's independence was reduced</a> because it was bending too far to meet the demands of governments who are afraid of systemic banking collapses or defaults:</p><p style="padding-left: 30px;">"But the current situation has emerged as part of a slippery slope that the ECB has been drawn down, making it 'the only game in town'. There is no easy way for it to get out. And the exit will become increasingly difficult, while at the same time the ECB is undermining its role as an independent central bank. Take the May 2010 decision [about the Greek debt crisis].</p><p style="padding-left: 30px;">"It was clear over the weekend that if nothing happened by Monday, there might be turmoil in financial markets. It was obvious Greece could not meet its payments. Finance ministers were unable to deliver a solution. So the ECB was put in a lose-lose situation. By not intervening in the market, the ECB was at risk of being held responsible for a market collapse. But by intervening, it would violate its mandate by selectively buying government bonds - its actions would be a substitute for fiscal policy. The ECB had respectable arguments to intervene.</p><p style="padding-left: 30px;">"But it turned out that the 'ECB had crossed the Rubicon.' Of course, Julius Caesar had to go on and conquer Rome. But there was no need for the ECB to say that in the future in the same situation, it would act in a similar manner. It could have been made clear that this was a once-only event and would never happen again. Otherwise, it is a slippery road."</p><p>He was then asked, "How long can everything keep going before something gives? The politicians do not want to take action ... Nobody with a surplus really wants to share fiscal burdens. So what happens next?" Issing replied:</p><p style="padding-left: 30px;">"Realistically, it will be a case of muddling through, struggling from one crisis to the next one. It is difficult to forecast how long this will continue for, but it cannot go on endlessly. Governments will pile up more debt - and then one day, the house of cards will collapse."</p><p>It is not clear whether Issing was saying that he <em>literally</em> believed the ECB and the euro would collapse in some sort of Europe-wide systematic debt crisis - <a href="http://www.telegraph.co.uk/business/2016/10/16/euro-house-of-cards-to-collapse-warns-ecb-prophet/">as The Telegraph's Ambrose Evans-Pritchard thinks</a> - or whether he was merely airing the truism that any system that only ever increases its indebtedness will, eventually, have difficulty shedding that load.</p><p>Issing went on to add, however, that there is a tension between the ECB's  monetary policy for the entire continent, and the individual countries which have their own "fiscal" (i.e. government spending) independence.</p><p>The system only works, he said, if the countries know that the ECB will<em> not</em> bail them out when things go wrong. That threat should keep them responsible. But since the Greek crisis the ECB has been effectively bailing out several European governments with cheap credit terms, and all the while the EU has been making noises about an ever-closer political union. </p><p><a href="http://www.centralbanking.com/central-banking-journal/interview/2473842/otmar-issing-on-why-the-euro-house-of-cards-is-set-to-collapse">Read the whole article here.</a></p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/wells-fargos-ceo-john-stumpf-phony-accounts-scandal-2016-9">Wells Fargo's CEO is giving up $41 million over the phony accounts scandal</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="Z1Mmo1NjE668rMobE1cuCf8vmhmYDPyF" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

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One of the euro's founding fathers says the ECB is 'living in a fantasy' by getting tough enough on inflation

Hamza Fareed Malik

The architect of the euro and the ECB says 'the house of cards will collapse'

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