The ECB Grows Up

The ECB statute was not engraved on stone tablets and handed down on Mount Sinai. It is a man-made charter, and it should be treated – by the German Constitutional Court and others – as a living document that is to be interpreted in light of current events.

BERKELEY – August 2 marked the first anniversary of the European Central Bank’s “outright monetary transactions” program, under which it stands ready to purchase government bonds on the secondary market. The ECB announced OMT in response to last summer’s panicked sales of southern European sovereign debt, which threatened to blow apart the eurozone.

At one level, the anniversary was a happy one. Yields on Spanish and Italian bonds, which had risen to unsustainable heights over fears of a eurozone breakup, fell sharply after the announcement. They have remained at lower levels ever since, despite little visible improvement in the European economy. Perhaps best of all, the ECB has never had to activate the facility. It has not actually bought any bonds under the program. Its promise to act was enough to calm markets.

But the OMT scheme is also condemned for exceeding the ECB’s mandate. Critics view it as a devious attempt to circumvent the prohibition on the ECB’s direct purchases of eurozone governments’ bonds. It is thus a source of moral hazard, for it relieves pressure on spendthrift politicians to balance budgets and push ahead with reforms. In addition, it is seen as exposing the ECB’s principal shareholders, notably Germany, to the risk of losses on their holdings of southern European bonds.

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