The European Monetary Union is stuck in a severe balance-of-payments imbalance. The European sovereign debt crisis, which followed the financial crisis, is present in the media, in politics and important economists try to evaluate the situation, in order to find possible solutions.
This paper deals with the TARGET balances. TARGET2 is a payment system in the European Monetary Union, and, as will be shown, the TARGET balances are a measure for the balance- of-payment deficits and surpluses in the countries of the Eurozone. The issue is interesting as there are huge differences in the current account balances of member states. To understand the emergence of the TARGET balances , it is important to first look at the way a central bank creates money. This paper aims to show how TARGET balances arise when trade flows are not financed through inverse capital flows. Further on, it examines the current account deficits of Greece, Ireland, Italy, Portugal and Spain and shows how they led to tremendous TARGET2 debts of those countries. On the other hand it examines, how particularly Germany, to a smaller extend also Finland, Luxembourg and the Netherlands accumulated high TARGET2 claims towards the Eurosystem. Further on, it examines the development of the monetary bases in the Eurozone and how this affected Bundesbank money creation.
Finally, it deals with some concerns regarding the TARGET balances . As it is a complex matter, opinions about their risk diverge. Some analysts think that they are highly problematic, others don’t see any risk at all. Some main ideas dealing with the risk involved will be presented in brief.
Inhaltsverzeichnis (Table of Contents)
- The European Sovereign Debt Crisis
- Money Creation and TARGET balances
- How Does a Central Bank Create Money?
- What is Target2 All About?
- TARGET balances in the GIIPS Countries
- Before Summer 2007
- After Summer 2007
- Reprinting Money
- Development of the Monetary Bases
- Money Creation in the GIIPS
- Modified Example from Section 2.2.2
- TARGET Balances Crowding Out Bundesbank Money Creation
- Why are the TARGET balances Problematic?
- Boosting the Crisis and Lack of Legitimization
- What is the Risk for Germany?
- Liability in Case of Bankruptcy
- Inflation in Germany?
- Conclusions and Outlook
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper examines the TARGET balances in the European Monetary Union, focusing on their role in the European sovereign debt crisis. It aims to explain how TARGET balances arise, their significance in the context of current account imbalances, and the potential risks associated with their accumulation. The key themes explored in the paper include:- The relationship between money creation, TARGET balances, and current account imbalances in the Eurozone
- The impact of TARGET balances on the monetary bases of Eurozone countries, particularly Germany
- The potential risks associated with TARGET balances, such as liability in case of bankruptcy and potential inflation
- The implications of TARGET balances for the stability and legitimacy of the Eurozone
Zusammenfassung der Kapitel (Chapter Summaries)
The European Sovereign Debt Crisis
The chapter introduces the European sovereign debt crisis as a consequence of the financial crisis, emphasizing the imbalance in payments within the Eurozone. It highlights the significance of TARGET balances as a measure of these imbalances and outlines the paper's focus on examining their origins and implications.Money Creation and TARGET balances
This chapter explores the two ways in which central banks create money: inside money, generated through asset purchases and refinancing operations, and outside money, originating abroad via the TARGET2 system. It also explains the role of TARGET2 as a payment system within the Eurozone.TARGET balances in the GIIPS Countries
This chapter examines the accumulation of TARGET2 debts by Greece, Ireland, Italy, Portugal, and Spain (GIIPS) due to their current account deficits, both before and after the summer of 2007.Reprinting Money
This chapter analyzes the development of monetary bases in the Eurozone, specifically focusing on the impact of TARGET balances on Bundesbank money creation. It also presents a modified example to illustrate the crowding-out effect of TARGET balances on national central bank refinancing operations.Why are the TARGET balances Problematic?
This chapter discusses concerns regarding the potential risks associated with TARGET balances. It explores the argument that they exacerbate the crisis by socializing losses and private gains, as well as the implications for Germany's liability in case of bankruptcy and the possibility of inflation.Frequently Asked Questions
What are TARGET2 balances in the Eurozone?
TARGET2 balances represent the net claims or liabilities of national central banks within the Eurosystem resulting from cross-border payments.
How do TARGET balances relate to the sovereign debt crisis?
During the crisis, capital flight and current account deficits in countries like Greece and Italy led to massive TARGET2 liabilities, while Germany accumulated high claims.
Why is Germany's high TARGET2 claim considered risky?
Critics argue that in the event of a Eurozone breakup or a member's bankruptcy, the Bundesbank could face significant financial losses on these claims.
What is the "crowding out" effect on money creation?
High TARGET2 claims can limit the need for national central banks to provide liquidity via traditional refinancing operations, affecting their balance sheets.
What are GIIPS countries in this context?
GIIPS refers to Greece, Ireland, Italy, Portugal, and Spain, which were the primary countries with high TARGET2 debts during the European debt crisis.
- Quote paper
- Sebastian Lechner (Author), 2012, The Target Balances in the Euro Area, Munich, GRIN Verlag, https://www.grin.com/document/231692
