Geldpolitik und die Eurozone

„The OMT has undoubtedly been successful in calming markets“: Comment by Mathias Hoffmann

The OMT has undoubtedly been successful in calming markets and, apparently, this end has been achieved without spending a single Euro so far. What might really happen once the ECB’s resolve is tested is more than doubtful, though.

1. I understand your concern that it becomes more likely that this resolve will be tested, if Germany and some parts of the German economics profession object against it and that this might be costly — for Germany and for the Euro zone at large. No question about that.

But the likelihood that the ECB’s resolve may have to be tested also increases when there is a general strike in Athens or Lisbon — but, thankfully,  I have not heard arguments that people’s right to protests in the street should be curtailed. So, if some people in Germany object against OMT by taking the issue to the constitutional court, that is nothing than their good right and the ECB should have anticipated these objections.

While I emphasize that I do not share most of the critics‘ concerns about the OMT, it is also true that the OMT sits uneasily with the German constitution and that a clarification in either direction might be helpful. This explicitly includes the possibility that the constitutional court approves of the OMT.

2. We should acknowledge, however, that the OMT IS markedly different from quantitative easing and other bond buying programmes in other countries (such as the US or UK). These countries have a single, homogeneous government bond market. In the OMT, the ECB will buy the bonds of particular countries.

While this may help the working of the monetary transmission mechanism in these countries, it reinforces the bad incentives for banks in these countries to load up on the debt of their own sovereigns — and this home bias in the ownership of government bonds s one of the the main reasons why member countries‘ sovereign positions have such a negative impact on the Eurozone as a whole. OMT perpetuates and aggravates this situation.
In fact, there is a lot of evidence that OMT has not solved the problems of monetary transmission in these member countries: banks‘ and government’s positions  have improved, but we continue to see a credit crunch for private households and firms in these countries. This just goes to show that OMT is clearly only a very partial solution. Since, in addition, it reinforces the deadly embrace between banks and their sovereigns, the balance of costs and benefits of OMT — even when viewed narrowly as a monetary policy measure — remains questionable.

At a more general level,  you argue that the OMT has moved us to a good equilibrium. How do we know?  The OMT is a put option on peripheral government bonds. As we know since Krugman, this will also dampen the reaction of bond spreads even within the margin of inaction of the ECB.
Hence, while the evidence over the last year suggests that we have moved to an equilibrium that is better in the short run. But this may still be an inefficient equilibrium, similar to the one that prevailed in the years before the Euro crisis, where peripheral government bonds were clearly mispriced. Clearly, such mispricing carries a lot of misincentives that can lead to all kinds of misallocations that become ever costlier in the long run.

Yes, of course you can argue that the OMT is a short term measure and that it now has to be complemented by structural reform. But at the same time, the put option implicit in the OMT has given governments the possibility to postpone structural reform, possibly indefinitely. This is true in particular as long as the OMT is not really active (i.e. as long as not a single Euro has to be spent), since we know that OMT support itself will be contingent on fiscal adjustment measures.

Summing up, I am NOT a critic of the OMT per se. It may have been the only solution ad hand in the summer last year and certainly took courage. The ECB should be applauded for that.  But I definitely see that it also carries a lot of risks and that it is clearly not a proven tool of monetary policy as the call would suggest. I could certainly be willing to support a slightly more nuanced call that also is more explicit on the risks.  Note that such a call would also allow to clarify that inflation — one of the main concerns of the critics in Germany — is not the main risk here.

That said, I think a more balanced debate about these issues in Germany is urgently needed and I want to congratulate you on initiating it!

 

Prof. Mathias Hoffmann
Professor for International Trade and Finance, University of Zurich

 

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