Orphanides Criticizes Crisis Management of EU Member States

On 13 September, Athanasios Orphanides, Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management, contributed to the SAFE Policy Lecture Series with a presentation on "The Politics of the Euro Area Crisis". His lecture was moderated by Otmar Issing, President of the Center for Financial Studies.

Orphanides warned that Eurozone economies have been heading towards disintegration since the emergence of the financial crisis in 2007; something which would threaten the very European Union project in the long run. According to the former President of the Central Bank of Cyprus, EU Member States had exacerbated this situation by standing in the way of an efficient fight against the crisis.

As an example for the imbalances within the Eurozone, Orphanides pointed to the very different unemployment rates. While unemployment in Cyprus, Greece, Ireland, Portugal and Spain has risen substantially since the beginning of the crisis, in Germany there are now less people unemployed than before the crisis.

Orphanides criticized the poor crisis management of European governments. This could partly be attributed to the incomplete construction of the Euro that did not provide for a crisis mechanism. One must simply have hoped that national governments would work together in the case of crisis to secure the welfare of all member states. However, this hope is mistaken, because governments first of all think of their voters and include other countries’ interests only to a less account in their decisions.

The Eurozone was clearly lacking a supranational institution with the authority to make decisions indpendently from national governments in case of crisis, Orpanides said. The European Central Bank (ECB) has not been able to solve the political problems of the Eurozone by itself; only being able to buy governments more time to solve the crisis and to prevent an immediate crash of the Eurozone by purchasing Greek government bonds and promising to purchase the bonds of other crisis countries under the Outright Monetary Transactions (OMT) Program. Furthermore, European governments have not made use of the breathing space secured by the ECB, but have continued to delay necessary decisions. This has only led to higher crisis costs for the whole Eurozone.

Orphanides called upon European governments to give up part of their sovereignty in order to overcome the problems now being faced. If not, private households in the crisis countries in particular will continue with their suffering.

Some of Orphanides’ arguments raised decisive criticism by Otmar Issing and parts of the audience. Issing and the former ECB Chief Economist, Jürgen Stark, opposed the positive assessment of the ECB’s bond purchases. Issing also rejected the assertion that the good labor market development in Germany would come at the expense of the southern European countries.