This space made it its mission to tirelessly point to the insanities of the eurozone, as you are well aware. On umpteen occasions over the past 10 years, I have tried to explain how the eurosystem works, and how the Target2 mechanism is the only way to balance out surpluses and deficits among the member nations, else the Euro as a currency would have long imploded. It is essentially the mother of all national vendor financings facilitated by the ECB.
I had predicted that Germany’s Target2 receivables, ie the country’s surpluses from current and capital accounts that need to be channelled back to the corresponding counterparts running deficits, would eventually hit 1 trillion Euros and become a truly existential threat for all parties involved. Eurocrats and other dogmatised pundits have always talked of Target2 being a mere accounting phenomenon, provided the eurozone stays together.
That has always been a big IF, even before the corona crisis and the ensuing fight for and against debt mutualisation that seems to now be reaching its pinnacle. The Eurogroup finance ministers could yet again neither find a resolution nor a compromise on Tuesday and will meet anew later today. The emotions have been flaring high, and it’s fair to say that we might not have been any closer to a desperate act of defiance by ailing Italy, one that could literally sink Europe’s ship.
Imagine a country like Italy being spurned by its northern neighbours and eventually turning its back on the EU. An exit would imply dropping out of the currency union as well. And Italy would not be alone. Spain and Portugal would be inclined to also pull the plug. The eurosystem were to collapse and all Target2 liabilities by definition in default. On top of this, Germany’s receivables hoarded at the Bundesbank are technically with the ECB and not fungible with any of the underlying periphery debt.
Let’s have a look at numbers, to get a sense of what this means. The Bundesbank just released its updated Target2 balance for March. It increased by 114 billion Euros, to a new total of 935 billion, ever closer to the predicted trillion. We don’t have Italy’s and Spain’s March numbers as yet, but it is to be assumed that Germany’s increase is a function of the periphery’s climb in liabilities. So, while in February Italy and Spain commanded a total balance of -800 billion, this number is surely deeper in the red for March.
Think about the 114 billion rise… What is the current account surplus likely to be for March? Probably around the 20 billion mark. But what about the other 95 billion? We won’t know for sure until we see the details of all countries, but it smells like a massive capital flight from the south to the north. Corona seems to have been a wakeup call for citizens and enterprises alike that Italy is being brought to its knees and savings and liquidity are in need to be rescued from potential capital controls or even bank closures.
So, if the periphery is deprived of the much-needed corona bond support by Germany & Co, the countries will have no other choice but to find greener pastures elsewhere, no matter whether this means immediate self-destruction and tearing the EU construct down with it. In such a case, Germany’s receivables will have exceeded a trillion, as we all know from Greece’s case that capital flight accelerates before capital controls are imposed – again, receivables against the ECB with no access to the underlying debts.
Would they be worthless overnight…? No, but they would be worth cents on the Euro, throwing Germany itself into an existential crisis and push the country to the brink of bankruptcy. Debt mutualisation as is being discussed may be the reddest of red lines Berlin does not want to cross, but essentially, debt mutualisation has already occurred all along during the past 10 years, and Germany had agreed to it when it made the pact with the devil and was lured into a monetary without fiscal union.
It’s just been called Target2…
