Target Risks without Euro Exits

Clemens Fuest, Hans-Werner Sinn

CESifo Forum 19 (4), 2018, 36–45.

The ifo President Clemens Fuest and his predecessor Hans-Werner Sinn are calling for a risk limit on overdrafts (Target balances) between the Eurozone’s central banks. "We show that, contrary to popular opinion, these balances still pose a threat to Eurozone taxpayers even if a Target-deficit country does not leave the Eurozone, but suffers a financial collapse while still in it," says Fuest.

"Risk protection mechanisms, like those enforced in the government bond purchasing programme, do effectively seal off other central banks if the crisis-afflicted country has no Target debt and no debt from its disproportionate issue of banknotes. But if such debts do exist, the other central banks in the Eurosystem, and especially the Bundesbank, are exposed to a considerable default risk. This risk is reflected in the federal budget and, in the event of a crisis, it subjects Germany to a liability mechanism that was not established by Bundestag resolutions, but by those of the European Central Bank Council."

According to Fuest and Sinn, the call for risk limitation raises the question of why debtor states in particular should agree to restrictions, as they actually benefit from the status quo of unlimited Target credit. But conversely, why should creditor states accept the numerous other demands for larger-scale redistribution in the Eurosystem that are currently on the table? The sum of over 900 billion euros granted by the Bundesbank to the Eurosystem via the Target overdraft facilities to date corresponds to nearly half of the Federal Republic of Germany’s net foreign wealth, which has been accumulated thanks to the export surpluses of previous years.

"The Eurozone reforms currently being negotiated include both measures to facilitate greater risk sharing, as well as measures to limit risk. Limiting the risk of overdrafts (daily balances) through collateralisation within the Eurosystem could be part of the risk-limiting measures adopted as part of the overall package," write the two economists in an essay for CESifo Forum 4/2018.

They add: "As committed Europeans, who see no alternative to the progress of European integration, we do not want our analysis to be understood as a fundamental critique of the euro; and certainly not of European integration itself. On the contrary, we believe that continuously improving and correcting the systemic errors that emerge in the course of the unification process is the only way to successfully complete the integration process. We see the ultimately unrestricted extension of Target credits without parliamentary control, based solely on decisions by the ECB’s Governing Council, as one such systemic error. It urgently needs to be corrected.”