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In the context of the European crisis, TARGET2 payment system of the European Monetary Union (EMU) countries became crucial, reflecting funding stress in the banking systems of most crisis-hit countries. This chapter analyses the role displayed by TARGET2 in the EMU, a monetary union of 19 sovereign States. Until now, the ECB has assumed a crucial role to overcome the European financial crisis. Anyway, to promote a full economic recovery in Europe, it is necessary a strong interconnection between single countries fiscal policies and the ECB’s autonomous monetary policy. In this regard, we conclude that, in the medium term, a successful crisis resolution requires more political integration of EMU countries, which should include a fiscal union and a banking union. However, in the short run, a prompt recovery is essential to get out of the trouble, and this requires that surplus countries (specially Germany) expand aggregate demand and let domestic wages and the ensuing internal inflation rate increase

Europe currently faces a severe economic and financial Great Crisis. It is often described as a sovereign debt crisis, but in fact it is really a sequence of interactions between sovereign problems and banking problems that caused a severe economic slowdown. It also caused a fragmentation of euro area financial markets. The explanation of the crisis focuses on the imbalances of European Monetary Union (EMU) countries balance-of-payments, where TARGET2 payment system became crucial, reflecting funding stress in the banking systems of crisis-hit countries. The decisions by European leaders to set up a banking union and the announcement, as well as adoption, of non-standard measures by the European Central Bank (ECB) greatly contributed to restoring confidence in euro area financial markets, improving market sentiment and reversing the earlier trend towards market fragmentation. Anyway, an expansion of European aggregate demand is needed to promote growth, and to this aim the role of Germany is crucial