Outright Monetary Transactions

Launch

On 2 August 2012, the Governing Council of the European Central Bank (ECB) announced that it would undertake outright transactions in secondary, sovereign bond markets, aimed "at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy". The technical framework of these operations was formulated on 6 September 2012.

Use, conditions, and duration of assistance

European Central Bank president Mario Draghi has stated that the bank's Governing Council is empowered to decide on the start, continuation and suspension of Outright Monetary Transactions, "in full discretion and acting in accordance with its monetary policy mandate".

For the OMT to be activated towards a certain eurozone state, a total of four conditions need to be fully met:

1. The state needs to have received financial sovereign support from the eurozone's bailout funds EFSF/ESM, either in the form of direct macroeconomic support or precautionary conditioned credit lines. Receiving a bank recapitalization support package, like Spain did, does not qualify.
2. The signed conditioned Memorandum of Understanding attached to the EFSF/ESM sovereign support programme, shall be complied with at the time of OMT purchases. If under review, no OMT purchases will happen until the review has been concluded with the finding of programme compliance.
3. OMT purchases can at the earliest start, upon the time when the state has managed to regain complete access to private lending markets. According to ECB's definition, a sovereign state will have managed to regain complete access to private lending markets, only when it has succeeded to issue a new government bond series with a 10-year maturity.
4. OMT purchases of the government bonds with 1–3 year maturity, will finally only happen, if ECB after all 3 above pre-conditions have been found to be met, at the same time find that the market traded interest rate values for the government bonds are distressed, at some higher values compared to what can be justified by the fundamental economic data for the concerned state.

OMT operations end once "their objectives are achieved" or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

During the first year, after the new OMT instrument had been born, it was never used. Yet, it was evaluated to have delivered a significant positive impact to solve the problem with a broken monetary transaction mechanism, resulting in some more fairly priced interest rate levels for states under sovereign financial support programmes from EFSF/ESM. Because, as a member of the Executive Board of the ECB, Benoît Cœuré, described it

At the end of 2014, the group of states eligible to receive OMT support were only Portugal and Ireland. As none of them, however, had met the fourth condition for support (suffering from distressed interest rates upon the time of their regain of complete access to private lending markets), still no OMTs had been activated by ECB. The next states presumed to have been potential candidates to receive OMT were Greece (expected to regain "complete access to lending markets" in 2015 but did not at that time) and Cyprus (also expected to regain complete access to lending markets in 2015 and also did not make it).

Program evaluation

Following the announcement of the ECB in the second half of 2012 government bond spreads within the Eurozone went down considerably. According to economics professor Paul De Grauwe, economist Yuemei Ji and researchers at the Cass Business School, this decline can be mainly attributed to OMT, making the sheer announcement of the program effective in its own right.

At the same time, as Paul Krugman notes, "the ECB's efforts rely to an important extent on a bluff, in the sense that nobody knows what would happen if OMT were actually required".

Post-Keynesian economists have expressed their doubts about OMT's effectiveness in dealing with the Euro area crisis, some arguing that the program will "fail", because "it doesn't address the core problem – that southern Europe is in depression and the only way out [of it] is for budget deficits to expand."

An ECB working paper evaluated the efficacy of OMT policies. That paper found that such policies "decreased the Italian and Spanish two-year government bond yields by about two percentage points, while leaving unchanged the bond yields of the same maturity in Germany and France". Moreover, "the scenario analysis suggests that the reduction in bond yields due to OMT announcements is associated with a significant increase in real activity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany."

Controversy and legal challenge

The decision of the European Central Bank to enact OMT operations was not adopted unanimously, with the German representative voting against it. Germany's Central Bank president Jens Weidmann, along with German economy minister Philipp Roesler had expressed their opposition to ECB's bond-buying plan, arguing that it might erode "the willingness of Eurozone member-states to implement reforms".

The OMT decision has also been challenged in the German Federal Constitutional Court by members of the German Bundestag, including German politician Peter Gauweiler, and by the German political party Die Linke. The German Constitutional Court requested a preliminary ruling from the European Court of Justice (ECJ) concerning the compatibility of the OMT decision with the Treaty on the Functioning of the European Union (Case C-62/14). In its request for a preliminary ruling, the German Constitutional Court expressed doubts about the legality of OMT under German and EU law. In January 2015, an Advocate General Opinion stated that the programme is in principle compatible with Treaty on the Functioning of the European Union. ECJ made its final ruling of the case in June 2015, declaring the conditional "OMT program" to be legal, as it due to its attached conditions "does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing of EU nations".

References

References

1. (December 16, 2019). "Interview with Libération".
2. (September 6, 2012). "Technical features of Outright Monetary Transactions".
3. that the principle of "full [[Sterilization (economics). sterilisation]]"[https://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html 6 September 2012 – Technical features of Outright Monetary Transactions] "The liquidity created through Outright Monetary Transactions will be fully sterilised."
4. (4 October 2012). "Press conference (4 October 2012): Introductory statement to the press conference (with Q&A)". ECB.
5. [https://www.bloomberg.com/news/2012-09-06/draghi-s-statement-on-ecb-outright-monetary-transactions-text.html "Draghi’s Statement on ECB Outright Monetary Transactions"], ''[[Bloomberg L.P.. Bloomberg]]'', 6 September 2012.
6. (2 September 2013). "Outright Monetary Transactions, one year on (Speech by Benoît Cœuré, Member of the Executive Board of the ECB)". ECB.
7. "Monetary Policy > Instruments > Open market operations". ECB.
8. (6 October 2014). "Greece plans new bond sales and confirms growth target for next year". Irish Independent.
9. (18 June 2014). "Cyprus Sells Bonds, Bailed-Out Nations' Market Exile". Bloomberg.
10. De Grauwe, P., & Y. Ji (2013). [http://www.voxeu.org/article/panic-driven-austerity-eurozone-and-its-implications "Panic-driven austerity in the Eurozone and its implications"], Vox EU, Paper on voxeu.org, 21 February 2013.
11. Saka, O., Fuertes, A.M. & E. Kalotychou (2015). [http://www.voxeu.org/article/how-did-ecb-save-eurozone-without-spending-single-euro "How did the ECB save the Eurozone without spending a single euro? "], Vox EU, Paper on voxeu.org, 26 March 2015.
12. Paul Krugman, [https://krugman.blogs.nytimes.com/2014/09/10/even-more-on-scotland "Even More On Scotland"], ''The New York Times'', 10 September 2014.
13. [[Bill Mitchell (economist)
14. Altavilla, Giannone and Lenza (2014). [https://ideas.repec.org/p/ecb/ecbwps/20141707.html "The financial and macroeconomic effects of OMT announcements"], European Central Bank, Working Paper Series 1707.
15. WSJ, [https://blogs.wsj.com/moneybeat/2014/08/05/economists-prove-the-success-of-ecbs-omt/ "Economists Prove Success of ECB’s OMT"], ''The Wall Street Journal'', 5 August 2014.
16. link. (2012-09-12 , CNN, 6 September 2012.)
17. (2014-01-14). "Decision of the German Bundesverfassungsgericht". [[Federal Constitutional Court of Germany]] – CURIA.
18. (2014-04-04). "Case C-62/14 Gauweiler and Others – Request for a preliminary ruling from the Bundesverfassungsgericht (Germany) lodged on 10 February 2014 – Peter Gauweiler and Others". [[Court of Justice of the European Union]] – CURIA.
19. (2014). "Law Meets Economics in the German Federal Constitutional Court: Outright Monetary Transactions on Trial". [[German Law Journal]].
20. Di Fabio, Udo. (2014). "Karlsruhe Makes a Referral". [[German Law Journal]].
21. (14 January 2015). "According to Advocate General Cruz Villalón, the ECB's Outright Monetary Transactions programme is compatible, in principle, with the TFEU". Court of Justice of the European Union.
22. (16 June 2015). "Draghi gets EU top court's backing for 2012 bond-buying plan". Kathimerini (Bloomberg).