— OMT To Restore Market Functioning, Not More Stimulus

FRANKFURT (MNI) – The Eurozone should create a common treasury and
define its overall political structures more clearly to ensure lasting
stability, European Central Bank Executive Board member Benoit Coeure
said Saturday.

“The notion that the euro is a currency without a state is in my
view misguided. The euro is a currency with a state – but it’s a state
whose branches of government are not yet clearly defined,” Coeure said
in a speech text prepared for delivery in Paris.

In particular, the “delineation between the Commission and the
Council – still require clarification,” he said. The creation of a “euro
area Treasury” – as suggested by former ECB President Jean-Claude
Trichet – would be “an important step in that direction.”

Completing political structures of the currency union “is a
necessary condition for lasting stability,” Coeure stressed.

The French Executive Board member defended the ECB’s new bond
purchase program, OMT, against criticism that the central bank is
overstretching its mandate and said the program was aimed at restoring
the proper functioning of financial markets rather than offering new
stimulus at a time when interest rates are still positive.

Recalling the ECB’s price stability mandate and recent speculation
about a break-up of the currency union, which has led to vast
divergences in financial conditions across the Eurozone, Coeure said:

“Integrity and financial cohesion are, jointly, an absolute
pre-condition for the treaty objective of price stability to be and to
remain a measurable objective for which the ECB can be held accountable,
and in that sense, they are undoubtedly part of its mandate.”

The OMTs in essence have the “same purpose as the non-standard
measures we adopted in 2008 and 2009: to price out a type of
catastrophic risk premium that investors demand in conditions of market
paralysis. It was breakdown risk in the early stage of the crisis, the
risk that the payments system would seize up completely. It is break-up
risk now,” Coeure said.

Defining the essence of these measures more succinctly, Coeure said
that they were to “to repair the functioning of the market, not to add
stimulus in a situation in which the policy rate was still positive.”

In this regard, Coeure promised that the OMT program would pose
absolutely no inflation risk to the Eurozone economy.

“On the issue of possible inflation risks stemming from OMTs, let
me assure you that, from a pure liquidity perspective, OMTs will not
inject one euro more into the economy,” he said. “All possible purchases
will be fully sterilised through the absorption of the additional
liquidity elsewhere.”

Coeure also reiterated that the OMT program would only become
operational once potential beneficiary countries agreed to implement
appropriate economic reforms.

“We need program conditionality and multilateral surveillance as a
precondition to initiate OMTs,” he said. “Without successful policy
reforms, there will be no OMTs.”

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@mni-news.com
–Paris newsroom, +331-46-22-46-8; e-mail: jduffy@mni-news.com

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