From Dr Desmond Lachman.
Sir, Your editorial “The euro after the Kahlsruhe ruling” (February 8) is certainly right to praise the German constitutional court’s wisdom to refer the issue of the constitutionality of the European Central Bank’s Outright Monetary Transaction programme to the European Court of Justice.
However, it would seem to be mistaken to question the German court’s view that the OMT amounts to de facto monetary financing of government debt, which is prohibited under Article 123 of the European Treaty.
Since in principle the OMT programme allows the ECB to buy unlimited amounts of a member country’s government debt in the secondary market with a maturity of up to three years, it effectively allows the ECB to determine interest rates in the secondary market.
As such, the ECB can effectively determine the interest rate at which the member country’s government can place bonds in the primary market, since the buyer of those bonds will know that there is a floor to the price of the bond that he can sell at any time in the secondary market. If that is not tantamount to ECB monetary financing of the government, it is difficult to see what is.
A key point that your editorial omits to mention is that it remains to be tested whether or not the OMT can be activated to pre-empt another European sovereign debt crisis. For the OMT’s activation requires that the benefiting country must first negotiate an IMF-style economic adjustment programme with the European Stability Mechanism.
It would seem far from clear whether either Italy or Spain would be politically in the position to negotiate such an adjustment programme other than when they are in the midst of a crisis.
-Desmond Lachman, American Enterprise Institute, Washington, DC, US