ECB’s Orphanides:Greek Adjustmnt Painful,Necessary;Optimistic

By Vicki Schmelzer

NEW YORK (MNI) – 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.”

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.

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.

“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.”

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 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.

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