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The TPI against the OMT

Jean-Pierre Dumas

22 septembre, 2022

The Transmission Protection Instrument (TPI) is an instrument invented by the ECB (2022) to allow the Bank to buy bonds of EZ countries with diverging interest rates from Germany (selective QE). The Outright Monetary Transactions (OMT) (2012) is a programme whereby the ECB purchases sovereign bonds in the secondary market (like the TPI) but under conditions that the country asking for aid (different from the TPI which is at the initiative of the ECB) will implement an adjustment programme. In the OMT instrument, the ECB will sterilize the creation of reserves, by selling other bonds (contrary to the QE instrument).

The Transmission Protection Instrument (TPI) is an instrument invented by the ECB to fudge conditionalities. It shows that: a) the ECB is afraid to ask conditionalities to its member states (except for poor countries like Greece) (conditionalities are good only for poor countries); b) the ECB is not as independent as it claims from governments.

This instrument is an incentive not to adjust. There is a limit to the traditional Keynesian argument which is in fact a disguise used by politicians to be popular to protect people against everything (covid, inflation). To use fiscal and monetary stimulus in time of crisis is lefgitimate, to continue a policy of carrying on huge spending knowing that the ECB will bail out irresponsible government is a major mistake in a monetary union with national public debt diverging from 200% of GDP (Greece) to 18% for Estonia.

The divergence in interest rates between member countries is the reflection of divergent public debt (the argument that different interest rates are due to bad speculators is silly, speculation will be the consequence of diverging debt not the cause), no monetary instrument can solve this fundamental divergence. A fiscal issue can only be solved by fiscal instruments not by artificial lending, source of inflation and worsening the unique currency.

The four criteria set up by the ECB for a country to be eligible to the TPI are nothing else than window dressing. 1) compliance with the EU fiscal framework is a farce since this “fiscal framework” has been suppressed with the covid. 2) Absence of severe economic imbalances, its definition and interpretation will depend on the European Commission’s judgement (in a developing country, economic imbalance appears itself without complex interpretation, the country lacks foreign exchange to imports and to service its foreign debt). 3) Sustainable debt. Debt sustainability is reviewed every year by the IMF for all countries through its art. IV. If you look at the IMF projection, all debt ratios are stable for the next five years. The reality is somewhat different. It is easy to project a constant debt ratio (manipulate the future rate of growth, reduce the future interest rate, project a strong declining primary deficit (the exact opposite of what will happen with this TPI). 4)Compliance with the EU recommendations, rather vague... the EC will decide. If you are rich and powerful, you may be treated differently than if you are poor (look at the Greek treatment). The EC alone does not have the capacity nor the legitimacy to design and impose an adjustment programme on a country.

If the TPI has been proposed by Mme Lagarde and the ECB’s board, we assume that this is because the ECB becomes more and more a political institution who is drifting in front of the huge difficulties it is facing. As a matter of fact, the ECB cannot solve a fiscal problem, this must be done by the ministry of finance of countries with huge debt burden (Greece, Italy, Portugal, Spain, France, Belgium). They are already reluctant to do it, they will be more with the TPI. These six countries account for half the EZ’s GDP; if one fails (Italy for ex.) others will follow suit, this is what the ECB does not want, but it has chosen the wrong instrument, it should have selected the existing one, the OMT set up by M. Draghi, which was explicitly based on an adjustment programme.

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