Abstract
The aim of this paper is to investigate the cause behind rising Target2 imbalances since early 2015, coinciding with the implementation of a quantitative easing program by the ECB. Two facts have captured our attention. Firstly, the official explanation of rising Target2 imbalances, offered by the ECB, is not convincing because it does not fit the empirical evidence available for Italy and Spain. Further, our alternative interpretation reveals that through quantitative easing, the ECB has helped to clean up banks? balance sheets and has indirectly funded government spending. Secondly, those who spoke out against the risks of rising Target2 imbalances in 2011-2012, now remain silent on this issue, despite the fact that some of the presumed risks during the first wave of rising imbalances still hold. We interpret this silence as an implicit acceptance that the risks put forward in 2011-2012 are offset by reform fatigue and anti-euro sentiments in the Euro Zone.
Highlights
Since March 2015, Target2 (T2 onwards) imbalances have been growing, with Italy and Spain accumulating large debtor positions, and Germany becoming the main creditor in the payment system, as in 2011-12
According to the above-mentioned official view, T2 imbalances have been rising because central banks have been purchasing national public debt from non-resident agents operating in international markets located in Germany and the Netherlands
This goes against the official version about T2 imbalances, provided by the ECB, which holds that the crossborder flow of reserves is occurring because bond purchases are taking place in international markets located in Germany and the Netherlands
Summary
Since March 2015, Target (T2 onwards) imbalances have been growing, with Italy and Spain accumulating large debtor positions, and Germany becoming the main creditor in the payment system, as in 2011-12. In Sinn (2011a), we find three relatively minor arguments that raised strong rejections and another central one, that has become rather influential The former arguments are: (i) the Target mechanism, combined with refinancing loans provided by central banks in peripheral EZ troubled countries, monetized large current account imbalances, for a long period of time, in GIPS countries (acronym for Greece, Ireland, Portugal and Spain); (ii) there was a crowding-out problem in Germany because banks in peripheral EZ countries were borrowing large amounts of official reserves; if the amount of reserves to be lent in refinancing operations by the European System of Central Banks is given, there were less reserves available to be lent to German banks to fund investment projects there (the reader should note that the loanable funds theory and the conventional money multiplier are behind this reasoning); and (iii) a solution to avoid increasing T2 imbalances was that these imbalances had to be repaid annually with gold, international reserves or marketable assets (Sinn (2012a)). Non-resident agents increased their holding of Spanish public debt by 51 billion euros, something that stands in contradiction with the official version: if the BdE had purchased 144 billion euros abroad and the government issued new debt by 86 billion, Spanish public debt held by nonresidents should have decreased by 58 billion (144 minus 86), even though all newly issued debt had been sold to non-resident counterparties
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