OMT tantamount to the monetary financing of debt
Letter to the Editor

Article Highlights

  • Lachman: The ECB can effectively determine interest rates of bonds

    Tweet This

  • It's still unclear whether Spain and Italy can negotiate an adjustment program now

    Tweet This

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

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

In year four of Dodd-Frank, over-regulation is getting old
image Halbig v. Burwell: A stunning rebuke of a lawless and reckless administration
image Beware all the retirement 'crisis' reports
image Cut people or change how they're paid
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Event Registration is Closed
Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.