August 13, 2013 Leave a comment
By Joshua Butt
Even before Mario Draghi finally introduced a market pleasing policy to match his political rhetoric to save the Euro at all costs, concerns were raised over the direction his “non-standard measures” were taking the European Central Bank (ECB).
Outright Monetary Transactions (OMT’s) were introduced with a promise to buy unlimited amounts of government bonds, with the aim to stabilise floundering Eurozone bond markets, particularly Spain and Italy, where borrowing has reached what economists labelled unsustainable levels.
The Deutsche Bundesbank (DB) has however refuted the legality of OMT’s.
Jens Weidmann, President of the DB, protested at the time of their introduction that OMT’s were no more than an attempt to allow states to print off the money needed to cover national debts, a policy falling well outside ECB’s mandate. Appearing in the German Constitutional Court recently, he reiterated that the ECB’s credibility was on the line if it failed to adhere to the strict mandate set out in the Maastricht Treaty.
The question must be however, why is it that the DB is so strongly opposed to OMT’s? After all, despite the policy being introduced last year, it has not been employed once and Spanish and Italian bond yields have remained relatively low compared to pre-OMT forecasts, leading Mr. Draghi to conclude in March that “It’s really very hard not to state that the OMT has been probably the most successful monetary policy measure undertaken in recent time.”
What is more, the OMT’s are not guaranteed without conditions attached: All bond-buying will be measured by the DB’s favoured response to the crisis, a healthy does of spending cuts and austerity. It certainly appears that the policy is working and is underpinned by a German endorsed solution to the crisis, so why introduce this court case?
For many residing within the ECB the message that this legal challenge sends to the European public and markets is that the Euro does not have Germany’s undying support, a message that will fundamentally unsettle any attempt to revive the economic health of the Eurozone.
The skeptics – and some holders of European government debt will certainly be hearing alarm bells loud and clear – jump to the conclusion that Germany will only back the Euro as long as it does not expose Germans to the cost. There may be an element of truth to this narrative and it is certainly one sure to resonate with the impoverished southern Europeans who have watched a decades worth of big-spending progress dismantled by ‘Troika’ (EU, ECB and IMF) enforced austerity, but for the DB this is in fact a matter of principle and it must stay firm in its challenge to the ECB.
The DB for many years has been the model of central banking, encouraging stability and fighting inflation as its primary goals. Its success convinced the founders of the ECB that this was the model that ought to be followed: A sober, steady, long-sighted bank, politically insolated, that could face the challenges of a unique experiment in monetary union. It is the banking system that balances the changing priorities of volatile politics. OMT’s reflect none of these profoundly sensible insights learned from German central banking. They are short-term, they are political and they are inflationary. OMT’s and similar schemes are not the realm of central banking, but it seems fall squarely into fiscal policy and is the responsibility of the political establishment.
The punch-line is of course that no such European body exists that can take such decisions, and certainly the political fall-out of national governments, asking taxpayers to guarantee the debt of another nation is unthinkable. The legal challenge of the DB on the ECB only serves to highlight the incompleteness of the European project. And that is what is at stake; while the court ruling (which is not anticipated for some months yet) will probably not recommend the end of German association with Europe, it will potentially define along what lines integration the Euro-project can continue. OMT’s may yet prove to be at least part of the answer that solves the economic woes of the Eurozone, however the direction the ECB is taking does not bode well for the political future of the EU, and it lies with the DB and the German Courts to halt their progress. Unfortunately by jumping into monetary union too soon it seems less and less likely that the project will ever be completed.