By NINA KOEPPEN
FRANKFURT—Portugal could run into even deeper fiscal trouble, with negative implications for other euro-zone nations, if governments don't accelerate steps to improve how the currency bloc is managed, one of the region's top central bankers said.
"Frankly, a lot of time has passed since the start of the sovereign crisis in the euro area and we still have not completed the work," Athanasios Orphanides, a member of the European Central Bank's Governing Council, said in an interview. "In the meantime, tensions in markets persist and this is not healthy for the euro area."
Associated Press photo / Philippos Christou
Athanasios Orphanides sees a 'threat of complacency' among governments.
Portugal appears to have recognized the cost of further delays, Mr. Orphanides said, adding that there is "a particular urgency" to Portugal's situation. "For other governments, I am indeed concerned that there is a threat of complacency, delaying very badly needed solutions," he said.
The comments from Mr. Orphanides, who also heads the central bank of Cyprus, add to voices saying inflation in the euro zone could become a growing concern, and could become more difficult to tackle if financial strains continue. "The sharp increases in food and energy prices over the last few months have been a surprise, and I don't think we can rule out further surprises that would result in inflation staying above 2% for somewhat longer what we expected before," he said.
Mr. Orphanides's remarks give a sharper edge to the ECB's recent expressions of frustration with the euro zone's 17 governments, reflecting growing concern inside the institution that has helped bring the euro-zone back from a financial debacle. ECB chief Jean-Claude Trichet has called for "a major improvement" of the legislation on economic governance to prevent another crisis.
Disagreement among euro-zone governments over fiscal compliance, competitive reforms and sturdier financial structures risk pitching Europe back into the debt crisis that a year ago threatened the stability of the entire region, Mr. Orphanides said.
"The longer our political leadership delay agreeing on a framework that will ensure stability, the greater is the threat that we may have another crisis similar to what we experienced in 2010," he said.
Euro-zone leaders will meet again on March 11 to try to patch over differences that remained open in a meeting of their finance ministers this month. At the core of the dispute is a Franco-German condition that further embellishments to a future permanent bailout facility for member governments be accompanied by tough fiscal rules, harmonized wage and pension structures and other changes to increase competitiveness.
Mr. Orphanides said "it would be a great disappointment" if euro-zone leaders fail to agree on a permanent crisis-resolution mechanism in March. "The urgency of the situation may not be perceived by all in the same manner," he said.
"Continued market tensions make it more complicated to design our monetary policy in a way that would be the most appropriate for all euro-area member states," he said.
Mr. Orphanides, who was educated at the Massachusetts Institute of Technology and wasa member of the U.S. Federal Reserve's policy staff from 1990 to 2007, is worried that governments aren't listening to warnings from financial markets, where investors are again demanding higher premiums on some government bonds.
Ten-year Portuguese bond yields are now trading above 7%, or about four percentage points over their German equivalents, a rate analysts say is unsustainable.
Mr. Orphanides said he wouldn't rule out another spike up in government-bond yields in some countries if euro-zone leaders fail to agree.
"I certainly hope that it won't happen, but we cannot exclude a movement in any direction," he said. "If we want to avoid a further deterioration, then it is of the essence to agree on the necessary improvements in euro-area governance. That's exactly why I say that it is urgent and that we need to act now."
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