„The Economics of Target Balances“


The Institute of International Monetary Research, University of Buckingham, 21 October 2020.

Professor Hans-Werner Sinn, CESifo and University of Munich, highlights Target balances risks and proposes radical reform of the ECB

What are Target Balances? 

Professor Sinn gave a lecture in the IIMR’s Money Webinar Series in late October 2020, delivering a very strong and important message for anyone interested in the sustainability of the euro and the reforms that need to be implemented in the future. This is a topic that he covers in his recently published book The Economics of Target Balances (Palgrave Macmillan 2020).
Target balances are the largest single item in some of the balance sheets of the Eurosystem’s national central banks (NCBs), and yet very little is known about them by the general public and even by economists. In the webinar Professor Sinn showed that Target balances measure overdraft credits between the NCBs that resemble ordinary fiscal credit and which have grown disproportionately, exceeding one billion euros. There is, however, no parliamentary legitimation for the Target balances. Professor Sinn shed light on the economic significance of the balances, questioned their limitlessness, and addressed some controversial views that have been expressed regarding them.  He concluded his lecture with a proposal to reform the Eurozone, including the following Treaty changes:

  • A new goal for the ECB: to avoid balance of payment imbalances inside the Eurosystem
  • New rules for the ECB Council, so that the NCBs voting rights are set according to their capital key; a majority vote would be  required for ELA credit.
  • ANFA assets should be banned entirely.
  • The establishment of a settlement system for Target balances, resembling that in the USA prior to 1975.
  • A staggered system of brackets for Target balances with progressively rising penalty rates.

Commenting on the report, the Chairman of the IIMR, Tim Congdon, said:

"Professor Sinn's analysis of the Target2 balances (or rather imbalances) is uniquely well-informed and thought-provoking. He supports European monetary integration, but is prepared to ask hard questions and to challenge the status quo. The Institute of International Monetary Research is greatly honoured to host and present this webinar video".

The purpose of the Institute of International Monetary Research is to demonstrate and bring to public attention the strong relationship between the quantity of money on the one hand, and the levels of national income and expenditure on the other. The Institute is an educational charity  which is associated with the University of Buckingham in England. It was set up in 2014.