Interpreting TARGET Balances in the European Monetary Union

Abstract

This article analyses the role displayed by TARGET balances in the European Monetary Union (EMU). In the context of the European financial crisis, very large TARGET unbalances became crucial, reflecting funding stress in the banking systems of most crisis-hit countries. The increase in TARGET balances in this period was triggered by a replacement of private sector funding of banks by central bank funding. By contrast, the more recent increases in TARGET balances are largely attributable to the implementation of the asset purchase programme (APP) by the European Central Bank (ECB), also known as a quantitative easing (Qe) monetary policy. Anyway, too much large TARGET balances continue to be a signal of underlying tensions among EMU member countries. This situation calls for macroeconomic imbalances to be addressed, trust in banking systems to be re-established, and the institutional foundations of EMU to be strengthened.