Mody, A. (2014) “The OMT’s fragile foundations“, VoxEU Organisation, 09 September.
Earlier this year, the German constitutional court declared the OMT programme to be inconsistent with EU’s law. This column reviews the legal framework and economic foundation of the OMT. Without any changes in the political structure, the OMT invokes moral hazard in the actions of the member states and unfairness in the distributing the burden of distress.
Earlier this year, the German Constitutional Court issued a strongly-worded opinion stating that the European Central Bank’s Outright Monetary Transactions (OMT) programme is inconsistent with the Treaty on the Functioning of the European Union (TFEU). The European Court of Justice (the ECJ) is to review this opinion.
The reaction to the German Court’s forceful stand has taken an idealised European perspective. Legal scholars have described the German Court as ‘confrontational’, with no competence in interpreting the TFEU (Pistor 2014). Economists – guided by a model of monetary and fiscal relationships within a political union – are also impatient. They see an overriding need for a lender-of-last resort for Eurozone sovereigns (de Grauwe 2011); any consequent implications for the ECB’s profits and capital (the joint property of member states) have technical solutions (de Grauwe 2014).
However, the Eurozone was consciously constructed as an incomplete monetary union – without a political union and with fiscal responsibility resolutely national. Absent that specific construction, there was no feasible political contract and, hence, no Eurozone. This unprecedented constellation left a gap — it assumed that all countries would behave prudently and so member states would not experience acute financial distress. The OMT’s success has highlighted that gap in the Eurozone’s design.
Relevant posts:
- Mody, A. (2014) “Did the German court do Europe a favour?“, Bruegel Working Paper 2014/09, 15 July.
- Fuertes Α.-Μ., Kalotychou , Ε. & Saka, Ο. (2014) “ECB Policy and Eurozone Fragility: Was De Grauwe Right?“, Economic Policy, CEPS Working Documents, 20 June.
- Pilkington, P., (2013) “The Continued Relevance of Tax-backed Bonds in a Post-OMT Eurozone“, Levy Economics Institute, Policy Note 2013/10, December.