Does TPI rhyme with OMT (of Mario Draghi memory)?

by Antonis D. Papagiannidis

The “whatever it takes” speech of then relatively fresh at the helm of the ECB Mario Draghi (end-July 2012) gave birth to the Outright Monetary Transactions Programme/OMT. The two, mainly exercising pressure on jittery markets – the OMT “big bazooka” was actually never used – were enough to keep the euro area intact; true enough, OMT had to prove its mettle before the Bundeserfassungsgericht and the European Court of Justice in 2014-15, but it will remain in Euro-history as a major step in European integration politics.

Almost exactly ten years later, the very worry about the fragmentation risk that motivated the ECB to tread over thin institutional ice – it was felt that it was acting ultra vires in even thinking of buying sovereign bonds of Member States so as to release pressure exercised by the markets – is being used again by the Bank Governing Council. Back then, the Draghi doctrine had to explain that transmission of ECB monetary policy might be hurt if financial markets were left to their own devices when facing less-resilient European economies. ECB interventions were thus legitimized, so later on (October 2014) APPs/Asset Purchase Programmes came on stream. With the “help” of the Covid-19 pandemic, the PEPP/Pandemic Emergency Purchase Programme banalised even further the notion of “non-standard” monetary policy measures, colloquially known as ECB quantitative easing.

So, it comes as some sort of anniversary that the novel instrument announced by the ECB as an addition to its monetary policy toolkit – this time around with far more political Christine Lagarde at the helm – is expressly named as a “Transmission Protection Instrument”. To be put in operation, through secondary purchases of securities, whenever euro countries are “experiencing a deterioration in financing conditions not warranted by country-specific fundamentals”.

Back then, at OMT times, the most exposed country was Greece (of course Italy was the elephant in the room, due to contagion fears) and it had to live under strict Adjustment Programme conditions; now, “too big to fail” Italy was directly in the crossfire; its sovereign paper’s spreads over Bunds started to widen.

But now the criteria for the TPI are far more lenient: compliance with the EU fiscal framework; public debt sustainability; absence of macroeconomic imbalances; “sound and sustainable” macro-policies; adherence to the commitments undertaken under RRF (the very commitments Mario Draghi was named Prime Minister of Italy to vouch for). Such criteria may sound strict enough – but anybody with some experience the working of the European Union feels they are here just to assuage the fears of the European North – which got a 0.5% increase in ECB’s own interest rate as a plus, instead of the 0.25% that was nor-or-less expected.

So… all is well in the realm of Europe, notwithstanding the fact that Mario Draghi left power in Rome just in time to see TPI announced!