"The role of stability insurance is to protect a member state against the idiosyncratic shocks that might otherwise create doubts about its ability to honour debt obligations in the future and unnecessarily raise its financing costs for a long time," Orphanides said at an event here.
"On their own, each member state faces some risk of this nature. But, to a large extent, each risk can be pooled by an insurance mechanism, thus eliminating idiosyncratic risk," he added.
In this situation, Orphanides explained, the insurance would take the form of loans available for EMU members who suffer from difficulties in obtaining market financing.
"Loans are not gifts," Orphanides stressed. "An insurance mechanism is not a transfer union."
The central banker also called for an improvement in data reporting and surveillance, saying that they were "essential to avoid the moral hazards ... and reap the benefits of the mutual insurance mechanism."
"A further step could be the adoption of stronger fiscal rules," Orphanides continued. "There is some evidence ... that states that have stronger fiscal rules actually have smaller premia on their own debt."
The development of proper enforcement mechanisms, including "clear automatic sanctions for misbehaviour by member states," would be of added benefit in improving governance in the Eurozone, Orphanides said,
"To encourage full compliance, sanctions should be meaningful and applied relatively early," he added. "They could include financial sanctions, such as reduced access to EU funds."
"But in my view, perhaps most importantly, they should also include political sanctions, such as the limitation or suspension of voting rights" For the latest updates PRESS CTR + D or visit Stock Market news Today
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