MEXICO CITY (Reuters) - The euro zone risks disintegration unless governments can agree on a banking union underpinned by a universal deposit safety net, former European Central Bank policymaker Athanasios Orphanides said on Saturday.
Orphanides, who was a member of the ECB Governing Council until May, said critics of unified deposit insurance - notably Germany - were harming the 17-nation region by allowing marked differences in bank interest rates and the safety of customer deposits from country to country.
The European Commission unveiled sweeping plans for the ECB to supervise all euro zone banks last week as a first step toward a banking union, though Germany immediately raised objections that the proposals risked overstretching the ECB.
“I think it’s essential that minds are changed in this direction otherwise I believe we risk the disintegration of the euro area,” Orphanides said on the sidelines of a Group of 20 seminar in Mexico City.
“Those governments that believe that we can have a system that penalizes banks in some states and subsidizes banks in another states are harming the euro area in a very significant way.”
Euro zone finance ministers meeting in Cyprus last weekend failed to agree on the framework for banking union, with Germany and others concerned that deposit guarantees will put them on the hook for banks in Greece or Spain by using deposits in their local banks to fund rescues in other countries.
While at the ECB, Orphanides advocated ultra-low interest rates at the height of the financial crisis and was a key architect of its original bond purchase program, which has been revived in a different format.
Now a professor at the Massachusetts Institute of Technology, the former Cyprus governor said the ECB’s move to link future bond purchases to reforms gave better incentives to politicians to push ahead with much-needed changes.
“The actions of the ECB have had the effect of buying some additional time for the governments and it is the governments that need to step in and take the bold, necessary, political decisions in order to restore stability,” Orphanides said.
He also urged emerging market economies to allow their currencies to appreciate to help rebalance the global economy, something countries such as Brazil have vowed to resist if extra stimulus in Europe, Japan and the United States puts pressure on local exchange rates.
“We cannot keep postponing ... the adjustment in exchange rates that needs to take place,” he said.
Reporting by Krista Hughes; editing by Mohammad Zargham