Is the ECB voting itself out of existence?

The European Central Bank is fiercely opposed to a Greek restructuring and has threatened to refuse Greek debt as collateral was the country to restructure.  Were the ECB to take that step it would bring about a collapse of Greece's banking system and would likely cause bank runs in other countries. While part of the ECB's rhetoric may be posturing, its rhetoric feeds further into a cycle of uncertainty surrounding the Eurozone's monetary union.

as of May 24, 2011. Source: Atlanta Fed (ht CR)

The ECB is not facing up to reality. Peripheral countries' debts are unsustainable, most acutely in Greece, and need to be restructured. The dogmatic pursuit by the ECB of further austerity measures in Greece will only depress the economy further and make a disorderly debt restructuring more likely.

The bank's disregard for the political dimension is startling: that the Greeks had enough of what they rightly perceive are policies imposed by outsiders who don't share in their pain. In the end, the European monetary union depends on continued domestic political support of all countries involved. In taking positions that may eventually lead to the EMU's breakup, the ECB is getting close to voting itself out of existence.

A rally Thursday in Athens against an austerity plan before the Greek Parliament (courtesy Reuters/New York Times)

The ECB, IMF and European finance ministers would be well advised to prepare in private for an orderly restructuring of peripheral countries' debts and ready measures to protect Europe's banking systems (such as large capital injections). Delaying the inevitable will only increase the eventual cost and recovery.