Opinion

Why OMT is not the solution for Italy right now

The Outright Monetary Transactions tool is not well suited for Italy right now. Italy needs fiscal support both by itself and by the EU. Italy and the rest of the EU need a fiscal bazooka. We should find a way of backstopping our economies immediately.

By: and Date: March 16, 2020 Topic: Macroeconomic policy

You…. start your term with … a system in need of reassurance that Outright Monetary Transactions (OMT) are ready to be used, if need be.” This is what we said in July 2019 when we wrote the memo to the incoming ECB president[1]. What we did not know back then is just how quickly she would have to contemplate the need.

The COVID19 virus that has affected Italy the worst, is now pushing the country in that direction.

For OMT to be activated it requires both for the country to ask and for the rest of euro area members states to agree. And it comes with conditionality, Greek style. OMT was always meant to be the nuclear option. The kind of thing you put in place so that you do not have to use it.

The question now, and for a little while longer, is not whether the ECB should apply OMT. The question is what can be done instead, so that it does not have to.

Olivier Blanchard argues, among others, for a “light” pre-emptive application of OMT. In the case Italy finds itself right now, “… conditionality should be very limited, and easy to define: Spend what you must on crisis containment and commit to wind down everything once the crisis is over. Full stop. No stigma.” he said in a twitter thread on the 13th of March.

A light OMT might be interesting from the euro-area perspective. If Italian spreads get the jitters others will follow. A readily available tool like OMT can help contain spreads and with them contagion. And it will give members states a handle on Italian economic choices through conditionality. It would be a good measure to protect the euro area convincingly.

But light or otherwise, OMT requires a temporary surrender of one’s economic sovereignty. Italy is hit by possibly the worst crisis aside of wars. It was the first in Europe that bore the human cost of the pandemic and the first to take drastic measures that entail severe economic costs. What do Italians think about “limited conditionality”, “commitment to wind-down”, and importantly “No stigma”? As medical resources are stretched, doctors are asking for guidance from the state on how to prioritize lives. Is this the right time to relinquish any sovereignty?

But beyond that there is also the issue of protecting the euro area. If OMT is a way of managing contagion and protecting the euro, why should the Italians bear the cost of doing so alone? All this changes if Italy is cut out of the markets. But till they are, incentives are not aligned and Italy will exercise its sovereign right to protect its own interests, first and foremost. It would not be reasonable to ask of anything less.

For the moment therefore we should look at other options. Italy still has access to the markets and is, as Blanchard says, “behaving extremely responsibly – more so than many”. Phillip Lane’s ECB blog on the 13th, provided a very clear description of the policy space that ECB has to help the euro area and, in the process, also Italy.

But the real elephant in the room is the perennial lack of centralised fiscal capacity. Euro area ministers will be discussing a coordinated response at the start of the week. It will require funds for direct medical assistance, like the solidarity fund the European Commission has just activated. But it will also require area-wide macroeconomic assistance to cushion the inevitable hit that comes from having to bring all economic activity to a halt.

If they do not rise up to such unique circumstances, demonstrate the level of solidarity that is truly needed, then ECB communication mishaps of last week will pale into insignificance.

[1] Preparing for Uncertainty: Memo to the President of the European Central Bank, Claeys, Demertzis and Papadia (July 2019), Bruegel.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Upcoming Event

May
25
14:30

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 Location: Bruegel, Rue de la Charité 33, 1210 Brussels
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 article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read about event More on this topic
 

Past Event

Past Event

What is in store for Euro area economies?

ECB Executive Board Member Philip Lane discusses the outlook for Euro area economies.

Speakers: Maria Demertzis and Philip Lane Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 5, 2022
Read about event More on this topic
 

Past Event

Past Event

From viruses to wars: recent disruptions to global trade and value chains

How have events in recent years impacted global trade and value chains and how can we strengthen these against future disruptions?

Speakers: Dalia Marin, Adil Mohommad and André Sapir Topic: Global economy and trade Date: April 27, 2022
Read article More on this topic More by this author
 

Opinion

China’s Covid policy to be year’s largest economic shock

Beijing’s ‘dynamic zero-Covid’ policy could devastate the domestic economy, but the effects will also be felt globally.

By: Alicia García-Herrero Topic: Global economy and trade Date: April 26, 2022
Read about event More on this topic
 

Past Event

Past Event

Tackling future risks to banks

How to address vulnerabilities in banks in the coming years?

Speakers: Maria Demertzis and Elizabeth McCaul Topic: Banking and capital markets Date: March 29, 2022
Read article
 

Opinion

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
 

Opinion

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
Read article Download PDF More on this topic
 

Blueprint

European governance

Greening Europe’s post-COVID-19 recovery

This Blueprint includes some of the Group’s most prominent voices on the different aspects of the multidimensional issue of green recovery.

By: Simone Tagliapietra, Guntram B. Wolff, Georg Zachmann, Laurence Tubiana, Laurence Boone, Antoine Dechezleprêtre, Jean Pisani-Ferry, Klaas Lenaerts, Thomas Wieser, Ottmar Edenhofer, Mirjam Kosch, Michael Pahle, Ian Parry, Robert N. Stavins, Sabine Mauderer and Tomasz Koźluk Topic: European governance Date: February 23, 2022
Read article More on this topic More by this author
 

Opinion

The weakness of average inflation targeting

Introducing average over time without defining what this means is counterproductive and current levels of inflation in the US will sooner or later expose this weakness in the Fed’s new strategy.

By: Maria Demertzis Topic: Macroeconomic policy Date: February 22, 2022
Read article Download PDF More on this topic More by this author
 

External Publication

Book notes: Monetary policy in times of crisis

Review of 'Monetary policy in times of crisis: a tale of two decades of the European Central Bank' published in the Central Banking.

By: Francesco Papadia Topic: Macroeconomic policy Date: February 17, 2022
Load more posts