European Central Bank Governing Council member Athanasios
Orphanides Thursday night addressed eurozone peripheral spread widening and the difficulties eurozone governments have had in dealing with the issue.“We have been in the epicenter of the crisis for a year,” he said in comments Thursday at a Bloomberg sponsored event for the Hellenic American Bankers Association.
What started in the U.S. in 2007, with the sub-prime mortgage debacle, soon “moved over and morphed into a sovereign debt crisis in Europe,” said Orphanides, who is also the governor of the central bank of Cyprus.
The wider spreads seen in the peripherals (Ireland, Portugal, and Greece) “reflects a crisis in confidence” in the eurozone. Regarding Greece, right now the market does not have confidence in the government’s ability to make needed reforms.
“What is clear is that additional progress is essential to restore confidence in the euro area,” Orphanides said. On the euro, he said the currency “has succeeded” in terms of what it was created for, “perhaps too well” and has contributed to the integration of financial markets. In terms of what has gone wrong in the eurozone, he put the blame
on “insufficient government discipline.”
on “insufficient government discipline.”
The rules of the Stability and Growth Pact in theory should have worked, but in practice “failed,” in that the only way to enforce the Pact was through peer pressure.
In the case of Greece, while debt-to-GDP levels below 3% were reported earlier, this was soon found to be false. Indeed, “in no year since Greece joined the euroarea did they ever have a deficit of GDP under 3% — this is the sort of difficulties with
statistics,” Orphanides said.
statistics,” Orphanides said.
The Greek government “lived beyond its means” and the Greek people did too, but mostly because they trusted what the government had been telling them.
“The government knew better,” Orphanides said. Nevertheless, he praised the steps taken by the Greek finance ministry and said the “long overdue reforms will revitalize the Greek economy.”
“The adjustments are painful, but necessary,” he asserted, adding that he was “overall optimistic on Greece.”
On the issue of measures under discussion that will strengthen the Stability and Growth Pact, he voiced concern that the proposals “don’t go far enough, with “too much discretion left” in determining whether a country is in violation of the SGP.”
In terms of loans to member countries, he stressed that these should be used only when necessary and should not be viewed as “gifts.”
However, Orphanides stressed that “progress is being made toward greater fiscal discipline” in the eurozone. “One thing we know about Europe — Europe moves forward in small steps only when there is a crisis and the existing framework no longer
works,” he said.
works,” he said.
“The crisis will be remembered for the progress we’ve made, not for
the pain,” Orphanides added. In Q&A, when asked about “haircuts,” he replied “they are unnecessary — I don’t want to see them happen.”
the pain,” Orphanides added. In Q&A, when asked about “haircuts,” he replied “they are unnecessary — I don’t want to see them happen.”
On the issue of Greece restructuring its debt, he said he believed
the IMF analysis and said the Greek government is determined to avoid restructuring.
the IMF analysis and said the Greek government is determined to avoid restructuring.
“The benefits of restructuring are low for the Greek government,” Orphanides noted.
“The shared sacrifice does not have to be in the form of restructured debt; it could be in the form of providing a cost of financing that is not prohibitively high,” he said.
On the issue of inflation and whether the ECB is right to look at headline inflation and the Federal Reserve at core inflation, Orphanides said “everyone (all central banks) look at everything.”
The thinking is that core inflation may be better overall as a gauge of where trendline inflation is heading, “but this is not necessarily true for the eurozone,” Orphanides said. Regarding rising food and energy prices, “Is it a temporary deviation?” he asked. “It is not clear these trends are as temporary as we would like them to be,” he said.
As for the ideal for the eurozone economy, Orphanides said, “we want price stability with high growth and high unemployment.”
“But we want to make sure we don’t overdo on the high growth and high unemployment since it hurts price stability,” he said. On the issue of monetary policy, Orphanides said “at what point should we worry that we have so much accommodative monetary policy in place.”
Depending on when and how it is removed, “we may end up with an overheated economy generating inflation in 2,3,4 years,” he said.
By Vicki Schmelzer
Source: Market News International
