The ECB's OMTs (Out-of-Mandate Transactions): The Former European Central Bank Official Takes Aim at a Central Bank Mandate Stretched to the Extreme

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The European Central Bank has assumed a decidedly proactive crisis management role and, in doing so, has stretched its mandate to the extreme. The International Monetary Fund, politicians, market players, and academics on both sides of the Atlantic have called for the ECB to take on an even more proactive crisis management role. They have pressed the ECB to correct its "genetic defect" and step into the breach as the lender of last resort to buy up the government bonds of struggling euro-area countries if need be on an unlimited scale--with a view to driving down the yields on these states' government bonds, which are deemed to be too high.

This also apparently triggered a heated debate within the ECB Governing Council. The outcome was predictable. On September 6, 2012, the launch of a new program was announced: the Outright Monetary Transactions (OMTs). The interventions in the secondary market for Italian and Spanish government bonds are, however, subject to conditionality. First, these countries must implement reforms and the European Stability Mechanism must participate in these interventions. Second, the monetary transmission mechanism must be dysfunctional. The path which the ECB has taken will overstretch the institution, further erode its political independence, and prevent it from carrying out its core mandate of safeguarding price stability. This could open the door to high inflation--not today, not tomorrow, but in the longer term.


The dispute within the ECB Governing Council is not a personal conflict between individual Council members. It is a clash over deeper and broader fundamental issues concerning the future orientation of monetary union and the role that the ECB should play in this. The dispute mirrors differing basic positions, experiences, and interests. Indeed, it seems as if the ECB is more and more taken hostage by the national interests of the periphery. The Governing Council would be better advised to read up on the historical and institutional role of monetary union and to adopt a resolute market-based approach to macroeconomic management, instead of indulging in short-sighted actionism and over-the-top pragmatism. The ECB has to be mindful of the limits of monetary policy, defend the ECB's core mandate, conform to statutory and legal regulations, and honor the vow made when the euro was launched to nurture a stability culture in Europe and not to embark on the road towards a liability and transfer union for which it has no legitimacy.

The ECB has repeatedly crossed red lines since the sovereign debt crisis began escalating. It started in spring 2010 with the purchase of government bonds of the crisis-stricken states on the secondary market and the dilution of collateral standards. While the ECB argued that it was taking these measures on monetary policy grounds, in actual fact it complemented governments' measures and was engaging in fiscal policy and the prohibited monetary financing of government budgets. Market players have noted that, in view of the conditions prevailing in the markets, the ECB interventions effectively mean subsidizing the government budgets of the countries concerned and hence add up to a financial transfer from the euro area's core to its periphery.

The ECB appeared to be conscious of the fact that the purchases of government securities by the Eurosystem were at least legally questionable. This was the background to the Governing Council's decision at the end of 2011 to discontinue the Securities Markets Programme but instead to provide banks with longer-term liquidity through two three-year refinancing operations. This was "closer to the ECB's mandate."

What has happened since the start of 2012 to cause the ECB Governing Council to decide to resume the purchase of government bonds? The answer is the plight of two major economies, namely Italy and Spain. The yields on these two countries' government bonds rose significantly on account of higher risks and growing uncertainty. …