European Central Bank: (Un)Conventional policy measures

On 6 September 2012, the European Central Bank (ECB) announced its Outright Monetary Transactions (OMT) programme. The ECB has taken a series of standard and non-standard measures throughout the financial turmoil, the global financial crisis and the Eurozone debt crisis. This is now the second action under which the central bank has entered the sovereign-debt market. In the course of the three intertwined crises, the ECB has extended the duration and amount of its loans to eurozone banks, accepted a wider range of collateral in exchange, and lowered its reserve requirements.

The ECB’s earlier measures took some pressure off financial markets but doubts have been cast on the debtor status of the central bank and on the existence of moral hazard which might discourage Member States and banks from carrying out necessary reforms. Whilst received with cheer, the long-term effects of ECB President Mario Draghi’s latest initiative to “preserve the euro” are still unclear. Sceptics question the politicisation of the ECB, the persistence of the moral hazard dilemma and the riskiness of an inflated ECB balance sheet. Additional efforts, such as the newly foreseen role of the ECB as eurozone-wide supervisor of banks, are likely to stir up the debate even further.

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