The OMT responded to a very different need, notably the need to defuse speculation on sovereign debt markets and to protect peripheral countries (at the time Spain and Italy) from the risk of default. The summer of 2012 was very difficult, as economic and political problems in Greece caused investors to flee from peripheral countries and spreads on sovereign bonds to increase at unprecedented levels. After the “whatever it takes” speech in July (But there is another message I want to tell you. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough), the ECB in September engaged almost unanimously to step in the market for sovereign bonds and, if necessary, to stretch its mandate by acting as a lender/buyer of last resort for countries in trouble.
With the OMT program, the ECB commits to buy unlimited amounts of sovereign bonds of countries in trouble that request assistance, thus de facto transforming itself into a lender of last resort. In exchange for ECB protection countries need to engage in a program of fiscal austerity and structural reforms. In other words with the OMT program the ECB offered insurance in exchange for reforms and austerity. A deal that would entail the loss of a good deal of sovereignty. It is not by chance that Spain always refused to apply for the program, in spite of heavy pressure, and that as of today no country ever used it. At the time the OMT program was wrongly interpreted as a clumsy attempt to implement quantitative easing in the Eurozone. It was instead clear, since the beginning that, as with any insurance scheme, its success would be measured precisely by the fact that the ECB would not have to intervene on bond markets.
So we need to be clear here. The European Court of Justice today [note from the editor: this piece was written before the European Court of Justice published its opinion about the Outright Monetary Transaction (OMT)] and in the next months will not be deciding on QE and macroeconomic management. It will be deciding whether the EMU has the right to rely on an insurance mechanism that all countries have. It will be deciding whether EMU governments borrow in their own currency, or in a foreign one. A major decision indeed.
*Read Franceso Saraceno’s blog Sparse Thoughts of a Gloomy European Economist.