De Grauwe/Ji: TARGET2 as a scapegoat for German errors

02 November 2012

This column by Paul De Grauwe and Yuemei Ji agrees that Germany would lose massively from a break-up, but argues that the ultimate source is the €600 billion current account surpluses it ran with other eurozone nations during the good years, not the TARGET2 system.

Conclusion

• The authors argue that the breakup risk, if it exists, is entirely of Germany’s own making.
• Germany has followed a conscious policy of accumulation of current account surpluses vis-à-vis the rest of the eurozone, especially during the period before the debt crisis.
• Inevitably this leads to a risk, as the counterpart of the current account surpluses was an accumulation of claims vis-à-vis the eurozone.
• The authors argue that if a breakup were to materialise, this will lead to losses for Germany, independently of the existence of TARGET2.
• Germany could have avoided this by reducing its current account surpluses; it refused to do so and thus the responsibility for this risk is Germany’s, and not some obscure system like TARGET2.

Before the debt crisis, German banks had been willing to lend massive amounts to the rest of the eurozone. Since the breakdown of the interbank market in the eurozone, this risk has been shifted to the Bundesbank. The authors have argued in this column that this shift has not affected the risk for Germany as a whole. With or without TARGET2, the risk that arises from reckless lending by German banks will have to be borne by Germany. Again, it is all too easy to look for a scapegoat outside of Germany.

Put differently, the authors maintain their conclusion arrived at in De Grauwe and Ji (2012) that the accumulation of TARGET2 claims by Germany has not added to the risks Germany faces in the case of a breakup of the eurozone. The TARGET2 claims of Germany have not created a new risk in addition to pre-existing ones. The TARGET2 claims are just a repackaging of risks that Germany took by accumulating large current account surpluses and by the fact that, prior to the debt crisis, German banks were willing to lend vast amounts of money to peripheral countries without doing a proper credit risk analysis. No-one other than Germany itself is responsible for taking on these risks.

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