Even though the debate about TARGET2 has already started about a year ago, the risks for Germany remain vague. In this report, we come to the following conclusions:
- The root of diverging TARGET balances across the Eurozone has been the financial (debt) crisis with its loss of interbank trust and deposit flight.
- Thus, the interpretation that Germany finances peripheral current account deficits via TARGET is not justified.
- Since German commercial banks have been receivers of capital inflows, they have (voluntarily) reduced their refinancing at the Bundesbank. Hence, the allegation that the Bundesbank has constrained the domestic supply of money in order to finance its TARGET2 balance is false.
- Instead of focusing on TARGET balances, one should evaluate the risks for Germany by directly referring to the risks involved by the liquidity supply of the Eurosystem (SMP, CBPP, ELA).
- Losses are borne by the Eurosystem as a whole, according to the capital share of each country. Hence, the size of individual TARGET2 balances is irrelevant for country specific risks.
