Friday, November 2, 2012
TARGET2 as a scapegoat for German errors
November 2, 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.