To Professors Fratzscher, Giavazzi, Portes, Weder di Mauro and Wyplosz and interested colleagues
I appreciate the discussion initiated by the Call on the OMT programme by professors Fratzscher, Giavazzi, Portes, Weder di Mauro and Wyplosz. The ideas proposed are good, but, in my opinion, too “romantic”. They need more economics.
1. It has been reported from the German Constitutional Court that all economic experts who were invited to testify before the Court have unanimously conceded that OMT implies a monetization of government debt, raising legal as well as economic issues.
2. Art. 123 TFEU makes clear that : “Overdraft facilities or any other type of credit facility with the European Central Bank or with … public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments. “
In order to clarify what “directly” means the European Council has decided in 1993: “purchases made on the secondary market must not be used to circumvent the objective of that Article” which means that purchases of euro government bonds by the ECB are prohibited, irrespectively of whether they come from a member state directly or indirectly through an intermediary. Hence unlimited OMT has to be judged as illegal.
3. It may be that the “lender of last resort” function of the ECB (if there is any) requires the temporary purchase of government bonds, typically “federal bonds” (in the case of a federal state) or in their absence, the purchase of a representative basket of member state bonds, but certainly not selective purchases of member state bonds “whatever it takes” (Draghi). It must be remembered that is not the mandate of the ECB to decide which member state should be rescued and which has to go bankrupt. Such a question has to be decided by the Council. It is the task of the ECB to save the euro, but it does not have the responsibility to safeguard the integrity of the euro area as that is a fiscal issue.
4. The authors of the call argue that “many central banks worldwide … have actively and successfully used programs to purchase debt of their sovereigns” and that it is “A step that has also been used by the Bundesbank itself in the past.” Yes, indeed, the Bundesbank has bought German Federal bonds, but it has never bought (selected) state bonds. Whatever its formal regulation, it could not afford to transgress this border line as such a step would have had detrimental effects to its policy and harmed its reputation among the other European central banks. It must be remembered that the Bundesbank had a monopoly in Germany, but not in Europe, and as such, its reputation was in permanent competition with the other European Central banks. The D-Mark became the anchor currency of the European Monetary System (EMS) not because the Bundesbank had a legal monopoly, but because it was the guarantor of a reliable policy. The Bundesbank would quickly have lost this privileged position had it abandoned its principles.
4. The ECB, in contrast, enjoys a legal monopoly in the euro area as a whole. It does not have to defend its anchor function by good performance, it is not constrained by competition, and it enjoys a large discretionary legal leeway. The consequences are obvious: Where the constraints of competition are lacking, the constraints by regulation must be stronger. It is evident that the ECB wants to get rid of regulatory constraints in order gain more power. But unrestricted power is rarely a good policy advice: it relies on the naïve romantic idea that policy makers are eager to serve the public interest.
5. If regulation is regarded as impossible to implement, a return to competition among national central banks is warranted, but, of course, competition among national central banks requires giving up the European monetary union.
Prof. Dr. Charles B. Blankart
Professor for Public Finances, Humboldt University of Berlin
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