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Dear Jouko Ylä-Liedenpohja,

While the euro crisis knocks down a succession of rescue packages, austerity programmes, solution proposals and even governments in the Eurozone, the Target imbalances keep quietly growing in the background. They have now reached truly alarming proportions, dwarfing by far the official loans given to the distressed countries by the entire Eurozone. In August and September alone, Italy's Target balance went from +6 billion to -104 billion, joining Greece, Ireland, Portugal and Spain in the debtor group. Conversely, Germany's claims on the system have by now ballooned to 466 billion euros, from practically nothing before the crisis started.

A new NBER paper written by Hans-Werner Sinn and Timo Wollmershaeuser of the Ifo Institute, an updated and abbreviated version of an earlier working paper published by CESifo in June 2011, explains the mechanics and significance of the Target issue and traces its evolution throughout the crisis. It comes to the following conclusions:

• Target deficits are balance-of-payment deficits of the classical kind.
• At the same time, Target deficits measure the extra money printed by a country to cover its balance of payment deficits.
• The euro crisis has basically the same origins and characteristics as the crisis of the Bretton Woods system.
• In the years 2008 - 2010, Greece and Portugal financed more than 90% of their current account deficits with the money-printing press.
• In the same period, 96% of Germany's current account surplus with the rest of the Eurozone was paid for with Target claims against the ECB rather than with marketable assets, as is normally the case.
• The Bundesbank's credits to the banking sector have become negative, i.e. the Bundesbank is now in a net debtor position with regard to German commercial banks.
• There are only two options to avoid the Target imbalances:
  1. Making Target credits more expensive: Paying for them with marketable assets as in the US, and maintaining interest rates for government bonds differentiated according to creditworthiness.
  2. Making normal credit for governments cheaper: Introduce Eurobonds and keep the interest on Target balances as is.

The paper advocates option 1, as only this option avoids excessive long-term capital flows and the rise of current account imbalances.


The NBER paper can be found here.

Best regards,

CESifo Information Services



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