On and off target
Internetartikel von Hans-Werner Sinn, VoxEu, 14.06.2011
Since the crisis, substantial mismatches in intra-Eurozone payments have arisen, and these have given rise to so-called Target2 imbalances. In the original Vox column on this, Hans-Werner Sinn argued that they were a hidden bailout – an assertion that has been criticised. In this column, Sinn responds to the critics.
My exposure of the Target2 balances issue (see here, here and here for German-language articles, and this website for an English-language one) has triggered a heated debate that has seen economics pundits take positions on either side of the argument. In essence, what I say is that the massive imbalances that have accumulated in the Target2 settlement system amount to a hidden bailout of the stricken economies in Europe’s periphery by the European Central Bank (ECB). My critics say that this is not so (Whelan 2011, Buiter et al 2011). Much of the criticism appears to stem from misunderstanding what admittedly is a very complex issue.
-The tolerance shown by the ECB towards the Target balances was wrong. It was not fundamentally wrong, as I have stressed more than once. It was in fact the right thing to do when the crisis began and the parliaments had no time to react. But it nonetheless was a de facto bailout, a fiscal measure that was facilitated by lowering the standards for the collateral for refinancing operations and providing Emergency Liquidity Assistance credits. The policy is now in its fourth year. There has by now been ample time to hand the issue over to the parliaments of Europe.
-The Bundesbank is liable in the same volume as its lending to the Eurosystem. This is incorrect and I never said that. While nearly all the Target debt of the GIPS countries (Greece, Ireland, Portugal, and Spain) is countered by a claim of the Bundesbank, the extra liability affecting the Bundesbank as a result of the Target balances, should the GIPS countries default, is limited to the German capital share in their Target debt. My first calculation of this amount, published on April 3 in the German daily Süddeutsche Zeitung (Sinn 2011a), came to a value at risk for the Bundesbank of €114 billion if all GIPS countries were to collapse and the bank collateral, often government bonds, lost its value. This sum was and remains correct, as it was calculated exactly as explained. Incidentally, in naming this figure, I say nothing at all regarding the probability of it falling due.
-Central bank credit creation is crowded out in Germany because the ECB fixes the monetary base. This argument is neither right nor have I ever made it. Crowding out occurs not because the supply but the demand for money is limited. Given the payment habits, economic activity and the ECB interest rate, only a given amount of central bank money is needed. Any excess liquidity brings no benefit and only involves interest costs. The German commercial banks can, at present, borrow as much money from the Bundesbank as they wish, but they do not want to. For this reason, the Bundesbank’s refinancing operations, i.e. the credit it gave to commercial banks, shrank in Germany basically to the same extent as money was flowing in through the Target2 system. The credit that the Bundesbank would have been creating in Germany was displaced by the jointly guaranteed credit it de facto gave via the central bank system to the GIPS countries.
The facts of the matter will perhaps become clearer if we bear in mind what the Target deficits of the GIPS countries, a hefty €340 billion by the end of last year, actually are. Essentially, they are the portion of the money created by the corresponding national central banks that was used for the net acquisition of goods and assets from other Eurozone countries. I gave this definition in my article of May 4 in the Frankfurter Allgemeine Zeitung, and it took me quite a bit of thinking to distil it. The €340 billion are in fact a loan to the GIPS from the euro community, which, like any other loan, made it possible for them to purchase more goods and assets abroad that would otherwise have been the case. In terms of liability and the transfer of resources actually involved, it differs little from short-term Eurobonds whose revenue is given as credit to the GIPS and entail a joint liability of all the Eurozone countries. The only difference with real Eurobonds is the fact that the central banks of the GIPS countries can dispose of such credit at their leisure as long as they offer collateral and that the Bundesbank cannot refuse to accept the purchase of the implicit Eurobonds.
The possibility of taking on Target loans encourages a self-servicing attitude. This is why the US central bank system excludes it, as explained in the articles mentioned above. And I find this relevant for Europe because, from an economic perspective, the 12 districts in the US do not differ much from the 17 euro countries. A district that wishes to import more goods than it exports must receive private credit from another district or hand over marketable assets, and a district whose citizens wish to acquire net assets from other districts must export more goods than it imports. It is not allowed to fulfill its wishes by cranking up the money-printing press as in the Eurozone.