Tuesday, September 18, 2012

What Germany should fear most is its own fear

by Paul De Grauwe and Yuemei Ji


September 18, 2012

Germany’s large accumulation of TARGET2 claims has created fear that Germany stands to lose vast amounts of wealth if the Eurozone were to break down. After clarifying the issues using basic economic principles, this column shows that Germany could avoid large wealth losses by restricting euro-to-mark conversions to German residents.

The large expansion of TARGET2 claims and liabilities since the start of the sovereign debt crisis has led to fears that countries like Germany would lose vast amounts if the Eurozone broke up (Sinn and Wollmershäuser 2012).

This fear created strong negative emotions vis-à-vis the Eurozone in Germany and thus became an important political factor. But is an EZ breakup a serious risk for Germany? We argue that the answer is no.

Our analysis proceeds in two steps.
  • We distinguish between the risks emerging from holding net foreign claims and the gross claims that TARGET2 balances comprise; and
  • We show how German wealth losses can be avoided in the case of a Eurozone breakup.

No comments: