Blog Post

The ECJ suggests OMT is compatible with the Treaty, but not with the Troika

the European Court of Justice’s Advocate General observed that the framing and implementation of monetary policy are the exclusive competence of the ECB, which “must have a broad discretion” when framing and implementing it. The question is therefore to establish what is monetary policy in the euro area, and then whether the OMT can be legitimately considered part of it.

By: Date: January 19, 2015 Topic: Macroeconomic policy

In September 2012, the European Central Bank announced its new Outright Monetary Transactions (OMT). The programme – very successful in easing tensions on sovereign bond markets – foresees the possibility to purchase government securities on the secondary market. It is virtually unlimited, although de facto limited by the existing outstanding stock of eligible bonds with maturities that make them eligible. Differently from a previous bond-buying programme (the SMP), the OMT specifies that the ECB will not have preferential creditor status in the occurrence of a credit event (i.e. it will be pari passu).

What is more important is that a necessary condition for OMT is explicit “strict and effective conditionality” attached to an appropriate EFSF/ESM programme

The objective of the OMT is to safeguard the monetary policy transmission mechanism in the euro area

The ECB intervention will not be automatic, but the Governing Council will decide on a case-by-case basis when and to what extent it will intervene. In particular: “the Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme. Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate”.

This conditionality is controversial. The OMT framework introduces explicit conditionality for the bond buying and it links the decision of the Governing Council to continue or suspend the OMT to the assessment of whether such conditionality is fulfilled.

As Zsolt Darvas and I pointed out earlier, this setting puts the ECB in an extremely delicate position. The objective of the OMT is to “safeguard the monetary policy transmission mechanism in all countries of the euro area. […] to preserve the singleness of […] monetary policy and to ensure the proper transmission”. At the same time the OMT is a monetary policy instrument, the activation and use of which is made subject to considerations that would not strictly pertain to a central bank in the exercise of its monetary policy competences. The ECB in fact explicitly commits to terminate the OMT not only – as it would be logical – in case the latter is no longer warranted from a monetary policy perspective, but also in case the beneficiary country fails to comply with the required conditionality..

And the implications of such conditionality requirement have been central to the advocate general’s opinion on whether the OMT falls within the statutory mandate of the ECB to conduct monetary policy (and thus is legitimate) or whether it actually amounts to economic policy of the kind that would fall outside the ECB’s mandate.

In his opinion, the European Court of Justice’s Advocate General observes that the framing and implementation of monetary policy are the exclusive competence of the ECB, which “must have a broad discretion”[1] when framing and implementing it. The question is therefore to establish what is monetary policy in the euro area, and then whether the OMT can be legitimately considered part of it.

The architecture of euro area monetary policy is essentially based on three articles of the Treaty. Article 119 states that the  “primary objective” of monetary policy shall be to “maintain price stability and, without prejudice to this objective, to support the general economic policies in the Union, in accordance with the principle of an open market economy with free competition”. Article 127 translates this general principle into an objective for the institution that deals with monetary policy, stating that the primary objective of the European System of Central Banks (ESCB) shall be to maintain price stability and that  – without prejudice to the objective of price stability – the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. Article 123 draws the boundary, by prohibiting the ESCB to engage in operations that amount to monetary financing.

From this, the advocate general states that, “for a measure of the ECB actually to form part of monetary policy, it must specifically serve the primary objective of maintaining price stability and it must also take the form of one of the monetary policy instruments expressly provided for in the Treaties and not be contrary to the requirement for fiscal discipline and the principle that there is no shared financial liability”[2]. If there were to be “isolated economic-policy aspects to the measure at issue”, the latter will be compatible with the ECB’s mandate only “as long as it serves to ‘support’ economic policy measures but remains subordinate to the ECB’s primary inflation objective”[3].

Whether the OMT is legitimate therefore depends on where the line between its monetary and economic policy component lies. In the opinion of the ECJ’s advocate general, linking the OMT to compliance with financial assistance programmes blurs this line considerably, because of the role that the ECB itself is assigned in the context of financial assistance.

By buying bonds in the context of OMT, ECB becomes a creditor of governments receiving financial assistance

The ESM Treaty confers multiple responsibilities on the ECB in the course of a financial assistance programme, including participation in negotiations and monitoring. The ECB’s hybrid role in the Troika raises concerns about possible conflicts of interest that the ECB could experience in relation to the conduct of its other functions. The potential conflict of interest with the ECB’s bond-purchase programmes is especially strong. By buying bonds of vulnerable countries in the context of OMT, the ECB would become formally a creditor of the governments receiving financial assistance, and this may influence its position in the negotiations and its assessment of conditionality.

The advocate seems to recognise this risk when he points out that “the ECB, in creating and announcing the OMT programme, did not properly weigh up the impact of its involvement in those financial assistance programmes on the monetary nature of the OMT programme[4]”.

The problem is that “the ECB is involved in the elaboration of the conditionality imposed on the State requesting assistance whilst, subsequently, it also takes part in the task of monitoring compliance with conditionality”. The ECJ’s Advocate general points out that “unilaterally making the purchase of government bonds subject to compliance with conditions when those conditions have been set by a third party is not the same as doing so when the ‘third party’ is not really a third party[5]”.

If the ECB is at the same time participating in the negotiation and monitoring of financial assistance programmes and deciding on the activation of the OMT, which requires the fulfilment of those programmes’ conditionality, then “the purchase of debt securities subject to conditions may become another instrument for enforcing the conditions of the financial assistance programmes[6]”. And if the OMT purchases can be perceived as an “instrument which serves macroeconomic conditionality” then their monetary policy nature is in doubt.

if the OMT were activated ECB will need to detach from direct involvement in monitoring the financial assistance to the State concerned

The conclusion is therefore that the ECB does not necessarily need be prevented from regularly participating in financial assistance programmes, because the fact that a financial assistance programme is adopted does not mean that an OMT programme will be activate for sure in the future. However, if the OMT were to be activated, it would be “essential for the ECB to detach itself henceforth from all direct involvement in the monitoring of the financial assistance programme applied to the State concerned[7]”. Otherwise, in the view of the advocate general, the OMT programme could no longer be considered a pure monetary policy measure.

This conclusion has potentially interesting consequences. A first question, if the ECJ were to follow the opinion of the advocate general, is what changes would be needed to the legal texts that establish the ECB’s participation in the Troika, i.e. the ESM Treaty and Regulation 472/2013. According to these documents, the negotiation and monitoring of programme conditionality should be done by the Commission “in liaison” with the ECB, a wording that is blurry. The question therefore is whether the ECB’s acting “in liaison” with the European Commission in the Troika qualifies as “direct involvement” in the sense suggested by the ECJ’s advocate general. If it were, and if the ECJ were to follow the opinion of the Advocate General, then the question is whether amendments should be made to these legal text to ensure remove the “liaison”.

A second question is whether the conditionality attached to the OMT programme would still make any sense. In a view to limit the moral hazard that could be induced by ECB’s purchases, the ECB Governing Council can decide to terminate the programme – even if it were still warranted from a monetary policy perspective – if the conditionality is not met. In order for the ECB to act independently in the pursuit of its monetary policy, the OMT technical rules state that such assessment is a prerogative of the Governing Council. At present, by directly taking part in the Troika, the ECB can form its judgement on the fulfilment of programme conditionality. But if it were no longer involved in the monitoring – as the advocate general seems to require – then the ECB’s assessment of conditionality fulfilment would need to be based on information obtained from a third party, i.e. the other institutions involved in the Troika.

The question then is whether this would still qualify as an independent decision. The definition of ECB independence is given in Article 130 TFEU, which states that “when exercising the powers and carrying out the tasks and duties conferred upon them […] neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body.”

While being true that the ECB would not be formally “instructed” by a third party to terminate OMT, the fulfilment of conditionality is a necessary requirement for the continuation of the purchases and that assessment would necessarily be outside of the ECB’s control, possibly exposing it to political capture. At that point, it would be more reasonable for the ECB to scrap the link to conditionality completely, making the OMT decision dependent only on the assessment of whether the programme is warranted from monetary policy purpose to safeguard the monetary policy transmission mechanism and to preserve the singleness of monetary policy.

monetary policy with conditionality presents significant theoretical and practical problems

In conclusion, in his opinion the ECJ advocate general pointed out the problematic multifaceted role of the ECB in the macroeconomic adjustment programmes,. This is welcome, as the ECB’s role in the Troika was ill designed since the start, and put the ECB in an uncomfortable position. On top of that, the analysis supports the claim that monetary policy with conditionality presents significant theoretical and practical problems and the logical consequence of requiring the ECB not to have any direct involvement in the programmes, if OMT is activated, makes the OMT conditionality even less meaningful and possibly tricky for the central bank’s independence. At that point, the least risky option would be to scrap the OMT’s link to conditionality completely. After all, it made little sense to put it there in the first place.

[1] See:

[2] Para 132, opinion of the Advocate General

[3] Ibidem

[4] Para 147

[5] Para 145

[6] Para 145

[7] Para 150

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic

Upcoming Event


How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy
Read about event

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read about event More on this topic

Upcoming Event

May - Jun


Final conference of the MICROPROD project

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Filippo di Mauro, Wolfhard Kaus, Steffen Müller, Gianluca Santoni, Verena Plümpe, Andrea Roventini, Valerie Smeets, Nicola Viegi, Markus Zimmermann and Javier Miranda Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More by this author

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article


European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author


The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Load more posts