Buying into New Ideas: the ECB’s Evolving Justification of OMT

It has become a consensus that Mario Draghi’s “whatever it takes”-speech and the ECB’s Outright Monetary Transactions (OMT), a bond purchase program under which the ECB committed to buying sovereign bonds without temporal and quantitative limits, saved the euro. What is less known, however, is that the speech was embedded into an ideational change at the ECB. This ideational change consisted in a shift away from the narrative of “expansionary austerity” towards the narrative of “multiple equilibria”. Whereas the ECB’s first analysis of the euro crisis emphasized weak fiscal fundamentals and called for fiscal adjustments (the “expansionary austerity”-narrative), its later diagnosis focused on self-fulfilling fears and the need for unlimited liquidity (the “multiple equilibria”-narrative). In my paper, I show how the latter narrative prevailed to displace the former due to the advocacy of a set of academics such as Paul De Grauwe, Cristian Kopf and Charles Wyplosz. First, I deploy a qualitative text analysis to elucidate the component parts of the narratives which structured the ECB’s ideational change. In a second step, I then I combine the findings of my text analysis with the results of five expert interviews I conducted with Paul De Grauwe, Christian Kopf, Charles Wyplosz, Olivier Blanchard and Daniel Gros in order to offer an explanation of what caused the ideational shift. The ECB’s ideational shift is puzzling for primarily three reasons. First, both the “expansionary austerity” and the “multiple equilibria” narrative of the crisis were supported by viable empirical evidence and strong theoretical arguments. Second, the Maastricht Treaty enabled the ECB to apply either narrative due to a vague definition of the objective of price stability. Third, Germany is the most powerful EA government, yet it promoted ordoliberal ideas and German stability culture, thus preferring structural adjustment and austerity politics over providing unlimited liquidity. Hence, if neither driven by market developments, institutional arrangements nor German power, why did the ECB’s interpretation of the crisis shift? Addressing this puzzle, I draw on the political economy of ideational change as developed by Mark Blyth and Colin Hay. I argue that the ascendency of the “multiple equilibria” narrative evolved in three steps which are (1) the pre-crisis existence of “multiple equilibria” ideas, (2) the Knightian uncertainty of the euro crisis and (3) its strategic advocacy by norm entrepreneurs such as De Grauwe, Kopf and Wyplosz. Building on Jeffrey Chwieroth’s and Andrew Baker’s constructivist analytics, I argue that in stage (3) the norm entrepreneurs' strategic advocacy was successful due to four Is: (a) an indicative reference point which ensured cohesiveness, (b) the norm entrepreneurs’ increasing credibility, (c) their institutional positioning and (d) the intellectual sensitivity of policy makers to the new narrative. The theoretical contribution of my paper is to place policy makers’ intellectual sensitivity more centre-stage than existing accounts. Further, by arguing that economic ideas shifted during the euro crisis my paper expands the existent constructivist literature on the crisis (such as Mark Blyth, Matthias Matthijs and Colin Crouch) which until now has largely claimed ideas didn’t change.