Friday, 9 August 2013

Passing the Bailout Buck

By Philipp Bagus (June 2012)

Recently, there has been an intense debate in Europe on the TARGET2 system (Trans-European Automated Real-time Gross Settlement Express Transfer System 2), which is the joint gross clearing system of the eurozone. The interpretation of this system and its balances has provoked divergent opinions. Some economists, most prominently Hans-Werner Sinn, have argued that TARGET2 amounts to a bailout system. Others have vehemently denied that. J├╝rgen Stark of the European Central Bank (ECB) even said that some commentators could lose their reputation as serious academics by claiming that TARGET2 functions as a bailout system.
Indeed, TARGET2 debits and credits have been built up since the beginning of the financial crisis. While peripheral countries accumulated TARGET2 debits, in April 2012 TARGET2 claims of the Bundesbank amounted to almost €644 billion. That is almost €8,000 per German.

But does TARGET2 really amount to an undercover bailout system for unsustainable living standards in the periphery? Let us start our analysis with a simple example of two individuals using a bank to clear their payments.

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