Otero Iglesias, Μ. (2015) “We should be wary of removing the ECB from the troika to facilitate the use of outright monetary transactions“, LSE EUROPP, 19 January.
A key legal debate in the context of the Eurozone crisis is whether so called ‘Outright Monetary Transactions’(OMT), which would allow the European Central Bank (ECB) to buy unlimited numbers of government bonds in secondary markets, are compatible with European law. The latest development in this debate came last week when one of the Advocates General of the European Court of Justice (ECJ), Pedro Cruz Villalón, stated that in principle OMT would be legal under the correct conditions, which include removing the ECB from the ‘troika’ which oversees financial support to Eurozone countries. Miguel Otero Iglesias writes that while the ECJ is not expected to give a full ruling until the autumn, political leaders should be cautious about removing the ECB from the troika without creating a new institution capable of filling its role.
Finally there is some good news for the Eurozone. An Advocate General of the European Union’s Court of Justice (ECJ) – the Spaniard, but European in its duty, Pedro Cruz Villalón– has declared that the Outright Monetary Transactions (OMT) programme of the ECB (which gives it the power to buy in unlimited amounts government bonds in the secondary markets) might be legal, under certain conditions. The use of the conditional here is important because the ‘opinion’of an Advocate General of the ECJ is only a recommendation and hence, although in 90 per cent of the cases the ECJ follows the advice, it is not legally binding.
The ECJ, which has its headquarters in Luxembourg, will publish its verdict in autumn. If it follows the recommendation of Cruz Villalón (and later the German Constitutional Court – which doubted the legality of OMT in the first place – accepts this decision) it would be a big step towards the “irreversibility”of the euro. The OMT saved the common currency at the peak of the Eurozone crisis in summer 2012 when Spain (which was too big to fail and too big to be rescued) asked the European Stability Mechanism for a 100 billion euros rescue credit line to bail out its banking system.
Relevant posts:
- Mody, Α. (2014) “Pulling the eurozone back from the brink- whatever its flaws, OMT is the closest thing to a safety net the eurozone has“, Bruegel Institute, 02 November.
- Siekmann, H. & Wieland, V. (2014) “The German Constitutional Court’s decision on OMT: Have markets misunderstood?“, Centre for Economic Policy Research, Policy Insight No. 74, October.
- Mody, A. (2014) “The OMT’s fragile foundations“, VoxEU Organisation, 09 September.