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Orphanides Says ECB Bond-Buy Plan May Delay Government Reforms

Former ECB overning Council member Athanasios Orphanides
Former European Central Bank Governing Council member Athanasios Orphanides said, “Strenghening governance is something we will hopefully see more of, and that’s the reason why we can be optimistic." Photographer: Price Chambers/Bloomberg

Former European Central Bank Governing Council member Athanasios Orphanides said the ECB’s bond-purchase plan may prompt governments to delay needed reforms.

The program, dubbed Outright Monetary Transactions, has “given governments yet another opportunity to postpone actions,” Orphanides said today at the Bloomberg Global Markets Summit in New York. “Inadvertently, the OMT may have delayed the progress that I would have hoped to see at the end of last year.”

ECB President Mario Draghi has pledged to buy unlimited amounts of sovereign bonds if needed to shore up confidence in the euro as long as governments sign up to economic reforms. The announcement of the plan alone has lowered borrowing costs in countries like Spain and Italy, reducing pressure on them to agree to the terms of ECB bond purchases.

Speaking at the same event, Harvard University professor Martin Feldstein, long a critic of the euro, said there is still a chance that some of its 17 member states will leave the monetary union.

If Spain and Italy are able to address their economic problems and return to budget surpluses, it would reduce concerns about the exit of nations such as Greece and Portugal, he said.

“Then euro-zone 2.0 may have a few people who are currently in it leaving,” Feldstein said, adding that “while others have made serious progress,” Greece is still “in terrible shape.”

U.K. Exit ‘Suicidal’

Orphanides, who sat on the ECB council as the governor of the central bank of Cyprus until last May, said European governments “need to realize that the governance of the euro area needs to be strengthened.”

“Strenghening governance is something we will hopefully see more of, and that’s the reason why we can be optimistic,” he said.

Asked about the possibility of the U.K. exiting the European Union, Orphanides, now a senior lecturer at the MIT Sloan School of Management in Cambridge, Massachusetts, said such an event would be catastrophic for London and Britain.

“It would be unthinkable that over the long haul London could remain the financial center of the euro area, and this is a huge risk to the U.K.,” he said. “The U.K. has benefited tremendously from the arrangement. Frankly, I think it would be suicidal for the British economy over the long run if they exited.”

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