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Orphanides says proposed ECB move signals ‘velvet divorce’ for eurozone

Former Cyprus Central Bank Governor Athanasios Orphanides has strongly criticised the European Central Bank (ECB) for “bowing to German pressure over eurozone quantitative easing (QE) and agreeing concessions that break EU rules”, according to the Financial Times (FT).
“It is as if it’s accepted that the euro area’s modus operandi is to clear things with Germany, and for the ECB to constrain its actions to what is best for Germany,” Orphanides told the financial newspaper. “This is inconsistent with and violates the [EU] treaty.”
Orphanides by virtue of his position as head of the Central Bank of Cyprus is also a former member of the ECB’s governing council.
ECB President Mario Draghi is widely expected to unveil a sovereign bond-buying programme at a policy meeting on Thursday in a bid to ward off deflation and kick-start growth, a move that has split the 25-member ECB council with Germany on the opposing side of the QE debate.
Chancellor Angela Merkel said on Monday the ECB’s plans should not be used as an excuse to postpone economic reform. But on Tuesday German Finance Minister Wolfgang Schaeuble said his country had to accept ECB decisions out of respect for the central bank’s independence, playing down the relevance of German objections to ECB bond-buying plans.
According to the FT, Draghi is expected to say that bonds bought will remain with national central banks, so losses will not be spread among eurozone members.
However Orphanides said changing the rules to avoid risk sharing “absolutely damages the effectiveness of QE”.
“It is not the best policy for the euro area as a whole and would not be promoting a single monetary policy,” Orphanides told the FT. The newspaper said the Cypriot economist’s views carried extra weight at the ECB because he worked previously as a senior adviser to the US Federal Reserve.
He told the FT that the EU treaty banned preferential treatment for any one national central bank or government, while members of the ECB’s governing council were required to “make the best possible decisions for the euro area as a whole”.
Without risk sharing, the ECB would introduce “a permanent convertibility premium” – or extra charge covering the risk of a eurozone break up – in bond markets. The result would be “a permanent subsidy” for Germany. “The notion that risk stays with the national central bank would signal that the ECB is preparing for a velvet divorce of the euro,” he told the FT.

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