–Adds Further Comments to Story Sent at 0822 EST

FRANKFURT (MNI) – A “well designed” macro-economic insurance
mechanism for the Eurozone would help to underpin confidence, help
eliminate “idiosyncratic risk” and demonstrate greater cohesion and
solidarity, European Central Bank Governing Council member Athanasios
Orphanides said on Wednesday.

“The role of stability insurance is to protect a member state
against the idiosyncratic shocks that might otherwise create doubts
about its ability to honour debt obligations in the future and
unnecessarily raise its financing costs for a long time,” Orphanides
said at an event here.

“On their own, each member state faces some risk of this nature.
But, to a large extent, each risk can be pooled by an insurance
mechanism, thus eliminating idiosyncratic risk,” he added.

In this situation, Orphanides explained, the insurance would take
the form of loans available for EMU members who suffer from difficulties
in obtaining market financing.

“Loans are not gifts,” Orphanides stressed. “An insurance mechanism
is not a transfer union.”

The central banker also called for an improvement in data reporting
and surveillance, saying that they were “essential to avoid the moral
hazards … and reap the benefits of the mutual insurance mechanism.”

“A further step could be the adoption of stronger fiscal rules,”
Orphanides continued. “There is some evidence … that states that have
stronger fiscal rules actually have smaller premia on their own debt.”

The development of proper enforcement mechanisms, including “clear
automatic sanctions for misbehaviour by member states,” would be of
added benefit in improving governance in the Eurozone, Orphanides said,

“To encourage full compliance, sanctions should be meaningful and
applied relatively early,” he added. “They could include financial
sanctions, such as reduced access to EU funds.”

“But in my view, perhaps most importantly, they should also include
political sanctions, such as the limitation or suspension of voting
rights”

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