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Since OMT was announced almost one year ago, its benefits have been widely acknowledged. The glut of liquidity in core economies has been partly reabsorbed, as deposits and savings have returned to the periphery. Funding costs in the countries under stress have fallen substantially. Both banks and firms in stressed countries have been able to regain access to market financing, both for funding and raising capital. Our initiative has therefore been beneficial to all: banks, companies and households – and it has benefited both periphery and core countries.
Let me highlight a few features of OMT that are essential to bear in mind.
First, OMT comes with strict and effective conditionality attached to a programme with the European Stability Mechanism (ESM). The initiative is activated only if a country submits to policy conditionality that leads to policy reforms. Governments are not presented with a choice between reforms or OMT. OMT comes only with reforms. And reforms need a disciplined process of monitoring and international surveillance for the country concerned. Otherwise, there is no OMT activation.
Second, conditionality enhances the independence and the effectiveness of our monetary policy. The reason is that conditionality is a necessary but not sufficient condition to activate OMT. We would only act if the right conditions for effective use of this monetary policy instrument were in place.
Third, the ECB would not act to compress spreads artificially; on the contrary, we believe that spreads should naturally reflect the underlying fiscal position of the sovereign and the economic prospects of the country. This is also why we emphasised that a sovereign needs to have market access to qualify for OMT.
Fourth, OMT does not entail a transfer of risks from periphery to core countries via the ECB’s balance sheet, over and beyond risks that are inevitable and inherent in the implementation of a single monetary policy for 17 sovereign states.
The OMT announcement has lowered risks for core countries: the risks of a euro area break-up; the risks arising from Target balances in such a scenario; and the risks from market interest rates distorted by safe-haven flows. Indeed, I would say that OMT is even more essential now as we see potential changes in the monetary policy stance with associated uncertainty in other jurisdictions of the integrated global economy.
One key issue is structural reform to make euro area economies more business friendly and more competitive in the global economy. There is a host of indicators – from the Global Competitiveness indicators to the Ease of Doing Business indicators – that lay out the reform agenda in no uncertain terms: only a handful of euro area countries rank highly on these indicators. Germany is among them, thanks to the resolute structural reforms implemented in this country ten years ago. These reforms are an inspiration for other countries.
Many European countries have structural problems: it takes longer to get licences, permits and other administrative authorisations than in other countries; the judicial system is slower; and regulation is more complex. Structural reforms may hurt a few vested interests, but they would clearly strengthen the effectiveness, competitiveness and, yes, also the fairness of our economies.
Another key issue is growth-friendly fiscal consolidation. We have to be mindful that debt-based fiscal spending is no way to growth. Euro area government debt has risen by almost 20 percentage points of GDP in the last 15 years and by over 50 percentage points in the last 30 years. At the same time, growth has fallen, from 3.8 per cent on average in the 1970s to 2.1 per cent in the 1990s and roughly zero now. Debt spending has not avoided the stagnation of economic growth.
But fiscal consolidation can be made much more growth-friendly by cutting unproductive expenditures, by establishing credible and detailed medium-term fiscal plans and by lowering the tax burden where it is harming economic activity and job creation in particular.
The third key issue is ensuring a sound financial system. This is where current efforts to establish a European banking union are crucial. The aim of the banking union is to establish transparency, stability and incentive-compatibility in the euro area financial market.