Will Outright Monetary Transactions (OMT) be able to bring us closer to the end of the nightmare of this crisis which, born in America in 2007-08, has relaunched in Europe since 2010? It's too early to tell. In fact, too many have been the past. Every time it seemed to have identified the crux of the matter - for example with the creation of the bailout fund (EFSF, then ESM) - then something happened to introduce new impediments. However, if we are not close to the end, it certainly seems to see a light at the end of the tunnel. To understand this, it is worth remembering how the Fed was born.
The main reason why in 1913 the United States established the Federal Reserve System, i.e. their Bandelusioni ca Centrale for simplicity called the Fed, was to respond to the frequent banking/financial crises which had repeatedly produced profound breaks in the great leap of that which was to become the world's dominant economic power over the last seventy years. While also depending on the instability of international capital flows, the condition of financial fragility in the pre-Fed USA also had an internal component. In fact, wide interest rate spreads existed between the financial center of New York and other states. For example, in 1894 six-month commercial paper paid an interest rate of 5,64% in San Francisco versus 3,52 in New York, or a spread of more than 200 basis points (bps). And San Francisco wasn't the most disadvantaged place. That same year, bank lending interest rates exceeded those of San Francisco by 470 bp in Washington state and as high as 640 and 650 bp in Arizona and Idaho. Such glaring gaps between states that shared the same currency generated political tensions and even financial fragility. In fact, when there was an abundance of liquidity - thanks to large inflows of capital from abroad - the banks and the financial market of New York provided large quantities of funds to other states. This fueled investments but also set in motion speculative phenomena, including real estate bubbles, which triggered banking crises and panics when liquidity became scarce. Thus the Fed's primary task was to provide liquidity to the banks, uniformly over time and space, so as to avoid panics. In doing so, the Fed brought about the (virtual) disappearance of interest rate spreads between the various states.
Under completely different development and context conditions, the Eurozone can now take a path similar to that which the USA undertook a century ago. By intervening with the OMTs, the ECB can insulate to a certain extent the level of interest rates in force in the individual member states from the deviations deriving from the volatility of capitals, now mainly due to the large-scale speculation which dominates our times. The sovereign debt crisis in weak Euro countries has produced significant interest rate spreads – Italy and Spain have been fluctuating between 400 and 500 basis points for a year – which, being the phenomenon lasting, have also been innervated by the cost of public debt that of private credit, generating strong recessionary effects. Since the extent of those spreads reflected not only and not so much acute sovereign default risks but also depended on institutional uncertainties about the persistence of the common currency, the monetary policy of the ECB led to asymmetric effects between the various member countries. If there are no hiccups and the OMTs come into operation as planned, the Italian and Iberian spreads will have to approach 200bp, values that can reasonably be attributed to the extra quid that these countries pay in terms of greater probability of default. Instead, the larger component of the spread, due to institutional uncertainties about the euro, will be neutralized, making the monetary stance less restrictive in these countries. And, indeed, compared to the end of August, the markets have already produced a reduction in the spread of almost 100 basis points for Italy and about 140 basis points for Spain. Investors therefore seem to believe that, through this new tool, the ECB will be able to make the cost of credit less heterogeneous among the various member states, as the Fed has done since its establishment.
But OMTs alone are not enough. Much more remains to be done. The oxygen granted by the ECB to the euro will only last a few years and this time must be used to strengthen political union and implement the banking compact. More in the short term, the fall in spreads should help halt the recession/deflation spiral, restore confidence in households and businesses and, thus, lay the conditions for the start of economic recovery. The Eurozone must return to growth and job creation in all its parts if it does not want to risk being overwhelmed by unbearable political and social tensions. The road ahead is still long and arduous, but thanks to the OMTs the Eurozone undoubtedly has more breathing space to complete the climb.
