Thursday, 6 September 2012

Draghi's OMT and its democratic implications

So today Mario Draghi set out his new master plan with a brand new fancy name that as usual can be turned into an acronym of three letters or more such as EFSF, EFSM and ESM. Today we can now add OMT to this list of acronyms, its full name being Outright Monetary Transactions. In a nut shell, the ECB proposes to buy shorter term sovereign bonds, 1-3 years remaining until maturity (meaning a 10 year bond with 3 years to maturity qualifies for purchase) in an unlimited quantity should troubled countries in the EMU ask for it. But there are conditions attached of course and the IMF is likely to be involved. The OMT program is "sterilised", meaning it will not increase the monetary base as for every bond purchase there is a corresponding sale. This probably means it will need to sell the bonds of the stronger euro area countries to finance the purchase of the weaker ones, pushing short term interest rates in the weaker economies down and interest rates in the stronger economies up. The long term validity of this program is uncertain however, as one day it will run out of bonds (or bunds) to sell.

One thing this will lead to, if countries ask the ECB to support their shorter terms bonds, is to further enslave these countries (I read somewhere that an old meaning of "freedom" is to be free of debt) as they will need to comply with further demands from the ECB and likely the IMF. This will again lead to further democratic problems further down the line as it reduces the sovereignty of these countries (budgets will need to be approved by the ECB/EU etc), which will again lead to the EU bureaucrats demanding further fiscal and political integration (as per normal) to solve the new "crisis" that evolves. This will then lead to closer integration or result in further resentment and the ultimate break up of the EMU. Ultimately however, freedom and sovereignty, and not indebtedness and "strict conditionality", will prevail. 

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