The European Crisis and the Accumulation of TARGET2 Imbalances

Abstract

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

Interpreting TARGET balances in the European Monetary Union: A critical review of the literature

“…On the emergency liquidity assistance (ELA) and monetary policy, see also on the website of the ECB https://www.ecb.europa.eu/mopo/ela/html/index.en.html. 6 On this argument see Cecioni and Ferrero (2012, p. 15-19) and Moro (2016). 7 In fact, what happened in the periphery countries was a twin crisis as described in Kaminsky and Reinhart (1999), as the financial crisis stopped the capital inflows ('sudden stop'), producing both a banking crisis (as banks could not be financed, here the causality is double, as the bad performance of banks is also responsible for the stop in inflows) and a current account crisis (as the capital inflows helped to finance the current account).…”

“…Such deleveraging could also hamper recovery in the short term. The problems were particularly acute in the vulnerable euro area member states (See Moro, 2016;Van Rixtel, 2013 newly increasing TARGET imbalances. This in part reflected the relatively higher participation of banks in some countries with TARGET liabilities in the Targeted Longer-Term Refinancing Operations (T-LTROs) program launched in June 2014, as these operations tended to be more attractive for such counterparties.…”

“…These measures are important elements of the Eurosystem's risk control framework (ECB, 2013, p. 111). 5 4 For a comment on this argument, see Cecioni and Ferrero (2012) and Moro (2014Moro ( , 2016. 5 In the event of a counterparty's default on an obligation arising from Eurosystem credit operations, the collateral is seized and sold in the market to mitigate potential losses.…”

Dysfonctionnement du système des paiements intra-européens

“…De ce fait, il semble logique de penser que les évolutions des balances des paiements soient liées à celles des soldes TARGET2. Plusieurs travaux traitant de la question stipulent que la crise de la dette dans la zone euro est la répercussion d'une crise des balances des paiements qui s'y est manifestée préalablement (Moro, 2016).…”