TARGET balances, Bretton Woods, and the Great Depression
Michael Bordo 21 March 2014
Since 2007, there has been a buildup of TARGET imbalances within the Eurosystem – growing liabilities of national central banks in the periphery matched by growing claims of central banks in the core. This column argues that, rather than signalling the collapse of the monetary system – as was the case for Bretton Woods between 1968 and 1971 – these TARGET imbalances represent a successful institutional innovation that prevented a repeat of the US payments crisis of 1933.
During the Eurozone crisis, an analogy was made between the events in Europe between 2007 and 2012 and the collapse of the Bretton Woods System between 1968 and 1971. There has been a build-up of TARGET liabilities since 2007 by some central banks (notably Greece, Ireland, Portugal, and Spain, or the ‘GIPS’), and of TARGET assets by Germany and others.
Economic history International finance
ECB, eurozone, euro, global imbalances, Central Banks, financial crisis, Great Depression, Eurosystem, Eurozone crisis, Bretton Woods, TARGET
TARGET2 as a scapegoat for German errors
Paul De Grauwe, Yuemei Ji 02 November 2012
A systemic Eurozone breakup would be the mother of all financial crises. This column – a rejoinder to Hans-Werner Sinn’s recent column – agrees that Germany would lose massively from a breakup, but argues that the ultimate source is the €600 billion current account surpluses it ran with other EZ nations during the good years, not the TARGET2 system. German banks lent vast amounts to peripheral countries without doing a proper credit analysis. No one other than Germany itself is responsible for taking on these risks.
The accumulation of TARGET2 balances (claims and liabilities) has two possible sources, current account imbalances and capital flows (Buiter et al. 2011). Thus, Germany’s accumulated TARGET2 claims of approximately €800 billion must be the result of a combination of current account surpluses and capital inflows. This is a matter of definition.
Disagreement arises from the nature of the risk that these TARGET2 claims imply for Germany (Sinn 2012, De Grauwe and Ji 2012). Let me discuss this risk by first concentrating on the German current accounts and then on capital inflows.
TARGET, TARGET2, EZ breakup
TARGET losses in case of a euro breakup
Hans-Werner Sinn 22 October 2012
Evaluation of the financial costs of a Eurozone breakup depends critically on the interpretation of the balances central banks hold in the EZ payment system. This column, which replies to the interpretation by De Grauwe and Ji, argues that TARGET balances represent real wealth that would be lost in a breakup.
When exchange rate adjustments are impossible, imbalances of cross-border payment flows must be accommodated officially. This baseline fact about monetary union has sparked extensive discussion on what the resulting asset positions mean (Sinn 2011a,b, Tornell and Westermann 2012, Whelan 2012).
Eurozone breakup, TARGET, TARGET2
German savers should applaud the growing TARGET balances
Sebastian Dullien, Mark Schieritz 07 May 2012
The Eurozone debt crisis has led to increasing imbalances among Europe’s central banks, the causes and consequences of which are the subject of fierce debate. But this column argues that the discussions are missing a fundamental point – the extent to which the German financial sector and German savers benefit from this arrangement.
The European debt crisis has led to increasing imbalances between Eurozone central banks, which then show up in the TARGET system (also known as the TARGET2 system). The causes and consequences of this phenomenon are the subject of a vivid and controversial debate (Sinn and Wollmerhäuser 2011, Buiter et al 2011, Merler and Pisani-Ferry 2012).
EU policies Europe's nations and regions
Germany, Eurozone crisis, TARGET, TARGET2
Eurosystem TARGET balance deviations call for cautious changing of the EU banking landscape
Ossi Leppänen 18 April 2012
Since the start of the crisis the Eurosystem balance sheet has grown from €1200 billion in June 2007 to around €2900 billion in March 2012. But this is spread unevenly among different central banks within the Eurozone, raising the thorny issue of intra-area (TARGET) balances. This column argues that these balances signal a need for change and restructuring in the Eurozone banking sector.
In the monetary policy analysis only the consolidated balance sheet of the Eurosystem is relevant. In a decentralised central banking system individual national central banks’ balance sheets are relevant when assessing banks’ short-term financing needs vis-à-vis each of the national central banks. Apart from this, the decentralised system also opens the tricky issue of intra-area (TARGET) balances.
EU policies International finance Monetary policy
financial regulation, Eurosystem, Eurozone crisis, TARGET
TARGET imbalances: Financing the capital-account reversal in Europe
Ashoka Mody, Fabian Bornhorst 07 March 2012
While the fall in Germany’s current-account surplus may have alleviated the Eurozone’s imbalances, another problem has arisen. This column argues that German exporters and banks are no longer Europe’s financiers but Germany is instead now filling this financing gap through so-called TARGET claims – the system for central bank settlements within the Eurosystem. At stake is not just academic curiosity but the financial architecture of the Eurozone.
There is a fierce ongoing debate over the so-called TARGET claims in the Eurozone. TARGET balances are the mechanism through which national central banks within the Eurosystem lend to each other. TARGET positions are intended to smooth over temporary liquidity needs of the member countries and the system is typically close to balanced. Since 2007, however, imbalances have grown steadily and as of this writing Germany has a large creditor position, while a number of countries have become net debtors (Figure 1).
EU policies Europe's nations and regions International finance
Eurozone crisis, TARGET, TARGET2
Eurozone Crisis, Act Two: Has the Bundesbank reached its limit?
Aaron Tornell, Frank Westermann 06 December 2011
If you thought the Eurozone crisis was coming to an end this week, this column argues that we may barely be reaching the end of Act One.
Act Two in the unfolding Eurozone drama begins this week as leaders at the European summit announce emergency measures to prevent further market turmoil. Why the sudden urgency? Because the German Bundesbank is about to exhaust its capacity to lend more funds to strapped governments.
EU policies Europe's nations and regions Monetary policy
ECB, Eurozone crisis, TARGET
A balance sheet view on TARGET – and why restrictions on TARGET would have hit Germany first
Clemens Jobst 19 July 2011
The debate over TARGET balances and whether there is an ongoing stealth bailout in the Eurozone has attracted attention from top economists and journalists in the past month. This column argues that the reason why the arguments keep dragging on is the lack of a clear framework for the discussion, something this column aims to provide.
By now most readers of European financial newspapers and blogs will have come across Hans-Werner Sinn’s repeated assertions (see Sinn 2011a and 2011b on this site and his latest here) about Germany’s “stealth bailout” of European peripheral economies and the “ticking time bomb” hidden in the €300 billion claims of the Bundesbank in the Eurozone payment system
EU policies Europe's nations and regions International finance
Germany, ECB, Bundesbank, Central Banks, Eurozone crisis, TARGET