Three magic words sufficed ECB President Mario Draghi at the height of the euro crisis almost three years ago to turn the mood in the financial markets: “Whatever it takes” ( whatever is necessary) will do the Central Bank in order to “save” the euro to. On the markets, the signal has been understood. In an emergency, the ECB firing on all cylinders and buys the bonds of over-indebted countries – in virtually unlimited volume. Immediately up the prices of crisis market bonds, and yields that reflected the risk fell.
Author:. Philip Plickert, editor-in business, in charge of “The Economist”
Draghi’s announcement clarifies the OMT program, since acts like a loan loss insurance. Who bears the cost?
Ultimately, we, the taxpayers of the euro countries with reasonably sound public finances. Because the ECB buys in vast quantities risky securities of the peripheral countries, the risk of default is communitarised. Monetary union mutates into a debt liability union – against the promises the politicians
.
What turns the process?
Essentially, it is a speech by ECB President Mario Draghi from the summer of 2012. At that time there was the monetary union in a turbulent situation and Draghi said during an event in London: “The ECB stands ready, within its mandate to do anything, what is needed to save the euro. “A short time later, the ECB decided, if necessary, without limit to buy under certain conditions government bonds of euro countries in acute financial. This buy-back program with the name “Outright Monetary Transactions” (OMT) is the subject of proceedings before the ECJ.
What is the main issue?
Single handed the announcement of the OMT program to calm the markets. The concede even critics. Had to make use of the ECB by the program so far never. And now runs already a multi-billion euro bond purchase program comprehensive (“QE”), which makes it even more unlikely that really take place once OMT purchases. Critics accuse the Federal Reserve before but she had exceeded its powers with the decision to theoretically unlimited purchase of government bonds. The ECB had “massively interfered in the economic policy, for which it has no expertise,” says the law expert Dietrich Murswiek. “She deliberately facilitate the financing conditions of the crisis countries, by – in economic terms -. Has the creditors of these countries offered a free credit default insurance”
And why are government bond purchases by the ECB so controversial?
Critics say the ECB as financiers ultimately sovereign debt by printing money. That makes the central bank depends on the respective States and would jeopardize its independence from the governments. It also crippling the willingness to reform when countries left out that it would, if necessary, set the ECB.
What the Federal Constitutional Court say?
The highest German court found in February 2014 concluded that the ECB had exceeded the OMT decision their skills because they must operate no independent economic policy, according to the EU Treaty. In addition, the OMT-decision against the ban on co-financing from national budgets contrary. However, Karlsruhe gave the subject to clarify to the ECJ.
What is the verdict for the current QE-purchase program?
First of all, nothing. Because the Luxembourg judges decide not about the around 60 billion euros a month comprehensive purchase program (“quantitative easing” or English “quantitative easing / QE”), which has been running since March 9 of this year. However: If the ECJ keep the OMT-decision for legal, he would the ECB at least legally give tailwind for the activities currently carried out purchases.
It is highly regrettable that the European Court of Justice has issued a charter for future mass bond purchases in a political judgment of the ECB. One program that clearly targets the financial effect to the rescue overindebted States is reinterpreted as a supposedly legitimate monetary policy measure. The fact that the ECB, the program activated only when an auxiliary application to the euro crisis fund and followed up on reform requirements, it does not get any better – it just shows that it encroaches on the economic policy and overstep its authority. You just no longer runs monetary policy.
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The monetary state financing is justified by the verschwurbelten term, we wanted to repair the “monetary transmission belts”. The spread, the price of risk is reinterpreted as “interference”.
The announcement of the OMT program and began in March blanket bond purchase should be purchased with the papers over a trillion euros, the returns themselves highly indebted euro countries have pushed to extremely low levels. Despite the recent increase, interest rates are still very low, as for Italy, with its debt of around 140 percent of economic output. The cheap into debt can only be explained by the bank’s policy. She has socialized the risk of default. But without a reasonable price for the risk, the next debt excesses in sight.
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