The debate about the so-called target-2-System of Central Banks is focused so mainly on the monetary level. The Target 2 system ensures that works of payments between the central banks of the euro system. The significant expansion of the Target-2 balances in the balance sheets of the national central banks on the one hand because the private sector dissolves in the periphery and restructures in the core countries.
Funding beyond this financial consolidation and capital flight, the peripheral countries continue to import goods from the central bank money creation in the Target 2 system. This has real economic consequences.
The projects financed through Target-2
Imports of goods into the periphery cement so the local non-competitive production structures and fuel are on the other side of the export and the positive developments on the labour market in Germany. To pre-Euro times, exchange rate movements would have triggered an early structural change. The current system introduces real economic misallocation and makes credit more likely events in the periphery. They should be classified as a peripheral country bankrupt and leave the euro, the ECB, the information in their possession as well as the sovereign debt write off their Bundesbank Target-2-requirements.
The potential burden on the taxpayer amounts already present in approximately the level of the annual federal budget. So what to do? Here we look at things from several perspectives. Basicallyр, it comes to three variants. Here is how the facts really are. From the theory of market failure, there are three alternatives. First, the policy could introduce a ceiling for Target 2 balances. Second, the ECB could get a special discount for government bonds, which she accepts, as collateral for refinancing operations contrary to rise.
Third, there is a very efficient alternative. It is for creating a market for debt rights in the eurozone, where one sets a maximum limit of loan growth. The countries would rata rights allocated debt that they could trade with each other. Negative externalities caused by excessive debt would be off so far as possible. Without reform of the Target 2 system running other reforms into space and save the euro would move further and further away.