Debt crisis in euro area from lack of economic governance, says ECB’s Orphanides

The sovereign debt crisis observed in the euro area is a manifestation of a deeper problem reflecting the shortcomings in the economic governance and crisis resolution framework in the euro area, ECB Governing Council member Athanassios Orphanides said Wednesday.
Speaking at the annual meeting of the Cyprus Institute of Internal Auditors, the Cyprus central bank Governor considered the weaknesses of economic governance in the euro area in the light of the ongoing discussions regarding its reform.
“Although it had been recognized all along that in a monetary union strong economic governance is a prerequisite for stability, the crisis revealed significant gaps in the Stability and Growth Pact (SGP) that was meant to ensure such good governance,” Orphanides said.
In this light, “the absence of an adequate crisis management framework for dealing with fiscal difficulties in euro area member states magnified the costs of contagion throughout the euro area and had become a major source of instability.”
Athanasios Orphanides identified two areas where prompt progress is essential. The first regards the ongoing discussion of the legislative proposals aiming at improving fiscal surveillance, strengthening the implementation of the SGP and revamping national budgetary frameworks. These proposals, based on the recommendations of the Van Rompuy task force report for reinforcing economic governance in the Union, represent steps in the right direction, according to Orphanides.
With regard to fiscal surveillance, Athanasios Orphanides stressed the need for improving the reliability of statistical reporting as well as enhancing the monitoring of budget plans by setting up independent agencies that would limit political interference and potential manipulation.
He commended the efforts by the European Parliament to ensure proper incentives for enforcing the SGP, for example by making sanctions for violations by member states more meaningful and by insisting on broader application of reversed qualified majority that limits the use of discretion, for example, to vote down a Commission recommendation aimed to correct clearly unsound budgetary policy by a member state. He called objections to these efforts that dilute the strengthening of the Stability and Growth Pact “short sighted and unfortunate”.
The second area that must urgently be addressed, according to Orphanides, regards the crisis resolution framework for the euro area.
While the main elements for the European Stability Mechanism have been agreed, crucial details are lacking.
“Because financial markets are forward looking,” he noted “the uncertainty created by lack of clarity regarding the handling of future potential crises has an adverse impact on the euro area today.”
In this light, “public discussion of potential debt restructuring by euro area sovereigns has been extremely damaging to the euro area economy as a whole,” he said.