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The European Balance of Payment Crisis A joint initiative of Ludwig-Maximilians-Universität and the Ifo Institute JANUARY Forum 2012 VOLUME 13 SPECIAL ISSUE THE EUROPEAN BALANCE OF PAYMENTS CRISIS Edited by Hans-Werner Sinn CESifo Forum ISSN 1615-245X A quarterly journal on European economic issues Publisher and distributor: Ifo Institute Poschingerstr. 5, D-81679 Munich, Germany Telephone ++49 89 9224-0, Telefax ++49 89 9224-98 53 69, e-mail [email protected] Annual subscription rate: n50.00 Single subscription rate: n15.00 Shipping not included Editors: John Whalley ([email protected]) and Chang Woon Nam ([email protected]) Indexed in EconLit Reproduction permitted only if source is stated and copy is sent to the Ifo Institute www.cesifo-group.de Forum Volume 13, Special Issue January 2012 _____________________________________________________________________________________ THE EUROPEAN BALANCE OF PAYMENTS CRISIS The European Balance of Payments Crisis: An Introduction Hans-Werner Sinn 3 The Balance of Payments Tells Us the Truth Helmut Schlesinger 11 The Eurosystem in Times of Crises: Greece in the Role of a Reserve Currency Country? Wilhelm Kohler 14 The Euro in 2084 Charles B. Blankart 23 The Refinancing of Banks Drives Target Debt Manfred J.M. Neumann 29 The Current Account Deficits of the GIPS Countries and Their Target Debts at the ECB Peter Bernholz 33 Macroeconomic Imbalances in EMU and the Eurosystem Thomas Mayer, Jochen Möbert and Christian Weistroffer 35 The Derailed Policies of the ECB Georg Milbradt 43 Notes on the Target2 Dispute Stefan Homburg 50 Money, Capital Markets and Welfare: An Analysis of the Effects of Target2 Balances Friedrich L. Sell and Beate Sauer 55 The Dissolving Asset Backing of the Euro Ingo Sauer 63 Balances in the Targe2 Payments System – A Problem? Jens Ulbrich and Alexander Lipponer 73 A Way to Solve the Euro pean Balance of Payments Crisis? Take a Chance on Market Solutions! Christian Fahrholz and Andreas Freytag 77 Target2 and Cross-border Interbank Payments during the Financial Crisis Ulrich Bindseil, Philippine Cour-Thimann and Philipp König 83 Ways Out of the European Sovereign Debt Crisis after the Decisions of the July 2011 Summit Franz-Christoph Zeitler 93 Balance of Payments Adjustment in the Monetary Union: Current Events Help Shed New Light on an Old Question Klaus Reeh 96 Greece: The Sudden Stop That Wasn’t Aaron Tornell and Frank Westermann 102 Editor’s Comments Hans-Werner Sinn 104 Special Issue THE EUROPEAN BALANCE OF PAYMENTS CRISIS THE EUROPEAN BALANCE OF cally share Schlesinger’s view emphasizing, among other things, the parallels to other balance of pay- PAYMENTS CRISIS: ments crises. AN INTRODUCTION To facilitate the readers’ familiarisation with the topic, the Ifo Institute’s views on the facts presented in HANS-WERNER SINN* earlier publications are summarised below. As the contributions and replies published in this issue refer to these views, it makes sense to outline them here. The European Monetary Union is currently experi- encing a serious internal balance of payments crisis that is similar, in many important ways, to the crisis of Borrowing the money printing press the Bretton Woods System in the years prior to its demise. In response to the crisis, the eurozone coun- The accumulated balance of payments deficit or sur- tries have mobilized enormous public rescue funds as plus of a euro country is measured by its Target lia- of May 2010. However, funding really started some bility or claim, as shown on the balance sheet of its 21/2 years prior to that point, in the autumn of 2007, central bank. In a currency union money usually when some eurozone countries began to draw Target criss-crosses country boundaries in either direction, loans out of the ECB system which happened to come with inflows and outflows balancing out. A balance of largely from the German Bundesbank, recently also payments imbalance arises for a country if there is a from the Dutch central bank, and amounted to sums net flow of money across its borders paying for an that dwarf these countries’ participation in the official adverse net flow of goods and/or assets.3 To the extent rescue packages. The Ifo Institute has published sev- that the net flow of money occurs electronically eral papers on this topic in recent months1 and has through the banking system it is recorded in the effectively created the first comprehensive eurozone Target accounts. We speak of a Target deficit and sur- Target database.2 plus, respectively, to denote the net flow of money crossing a border, and of a Target debt and liability to Today it is the economic interpretation of events, denote the respective accumulated stocks, which are rather than the facts, which is controversial. For this recorded in the balance sheets of national central reason we have compiled various opinions in a spe- banks. cial issue of the CESifo Forum. The authors range from current representatives of the Bundesbank and The reason why the Target balances are recorded in the ECB, who wish to convey a sense of normality, to the balance sheets of national central banks can per- Helmut Schlesinger, ex-Bundesbank President and haps best be understood by seeing the net flows of Georg Milbradt, the former Minister President and money as resulting from the attempt of a deficit Finance Minister of Saxony, who express their deep country to refinance its payment deficit by borrowing concern regarding the Target balances. Schlesinger a printing press from other central banks. This explicitly criticises the reassuring statements issued heuristic interpretation will be explained in greater by his former institution. The economists from uni- detail below. versities and banks who submitted comments basi- * Ifo Institute. However, before we come to the economics, let us take 1 See, for example, Sinn (2011a, 2011b, 2011c, 2011d and 2011e); a closer look at the bare facts. Until the first break- Sinn and Wollmershäuser (2011a) and in particular (2011b). 2 In principle the Target data stem from the NCB balance sheets. down of the interbank market in 2007 there were However, as some countries do not publish such data, they have to be reconstructed from IMF statistics. For details see Sinn and hardly any noticeable balance of payments imbal- Wollmershäuser (2011, and particularly the appendix of the NBER version of that paper). The ECB itself does not possess a compre- hensive data set, but reconstructed the data for missing countries in the same way as the Ifo Institute has done. See European Central 3 The term ‘money’ is used here always in the sense of ‘central bank Bank (2011, 37, footnote 5). money’ or ‘base money’. 3 CESifo Forum 2012 Special Issue ances in the eurozone. But then they increased rapid- lows the ECB rules for lending refinancing credit to ly, showing huge deficits in the GIPS countries commercial banks. The only limit on the creation of (Greece, Ireland, Portugal, Spain). By the middle of money related to country size is the amount of collat- 2011 (June), the sum of the accumulated balance of eral that commercial banks can offer for refinancing payments deficits (Target liabilities) of the GIPS the credits that they draw, but the ECB has gradually countries had risen to 327 billion euros. Its counter- extended this limit by reducing the safety require- part was the sum of accumulated balance of pay- ments for the collateral accepted. Nowadays, govern- ments surpluses (Target claims) of Germany, which ment bonds of Greece, Ireland and Portugal are were 337 billion euros by that time. acceptable as collateral despite the fact that the rating agencies do not give them investment grade. More- Until the summer of 2011, sizeable balance of pay- over, ABS paper created by the banks themselves and ments disequilibria in the euro area basically only con- non-marketable claims have increasingly been accept- cerned these countries. Even Italy’s balance of ed as collateral. payment was in equilibrium. In August 2011, how ever, things started to change dramatically, with the public The additional money that was put into circulation by finances of Italy and France coming under closer the central banks of the GIPS countries and which scrutiny. The Italian Target balance, which was – 16 bil- then seeped away to other countries of the euro area lion euros in July, had skyrocketed to – 191 billion financed a net inflow of goods and assets. Here, the euros by the end of 2011. Similarly, the French Target term ‘assets’ is being defined broadly. It comprises balance went from + 1 billion euros in July to – 80 bil- companies, stocks, bonds or mere promissory notes or lion euros in November. Meanwhile Germany’s Target ‘IOUs’ as the counterpart of a loan raised abroad.4 claim increased to 463 billion euros in December 2011 Goods, in turn, comprise services (including financial or 5.7 thousand euros per capita. About half of services), merchandise and commodities, as recorded Germany’s net foreign wealth is now a Target claim of in the current account. the Bundesbank against other central banks in Europe. Countries whose balance of payment is in equilibrium Not only the Bundesbank accumulated Target claims. have no net flow of goods and assets with foreign The Dutch central bank also was heavily involved. By countries. The net importers of goods pay their for- November 2011, the Dutch central bank had accumu- eign partners with an outflow of assets, and the net lated a claim of 145 billion euros, which amounted to exporters of goods buy those foreign assets with their even 8.7 thousand euros per capita. revenues. Only countries whose balance of payment is in disequilibrium have such net flows. The net If a country’s money is seeping away to other juris- importers of goods and assets suffer from an outflow dictions, the stock of money circulating at home is of money, and the net exporters of goods and assets shrinking.
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