| Author (Corporate) | European Parliament: European Parliamentary Research Service |
|---|---|
| Publisher | EU |
| Series Title | In-Depth Analysis |
| Series Details | November 2017 |
| Publication Date | November 2017 |
| Content Type | Report |
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TARGET imbalances at record levels: Should we worry [1] TARGET is the payments system for making settlements between euro area economies and five other EU economies. Cross-border transactions generate claims/surpluses and liabilities/deficits among national central banks which 'net out' for the system as a whole. These imbalances are manageable in relative terms, but look large in absolute terms. None are larger than one third of their corresponding public debt ratios; and despite a big build up in the 2010-13 period, the imbalances now appear to be on a non-expanding cyclical path. The implications for the EU economies and their policymakers are less easy. The main drivers, beyond the need to fund persistent current account deficits or surpluses, are the use of different funding sources (some outside the euro area), internal and external portfolio re-balancing, loose monetary policy and exchange rate risks. TARGET imbalances support quantitative easing, but are not driven by it. The main threats are the divergence that interrupts further economic integration; and the increasing liabilities taken on by the ECB since 2015. That said, self-correcting mechanisms are weak which makes symmetric adjustments by both creditor and debtor countries essential (because of the adding up constraint); and the difficulty that the imbalances cannot always be eliminated simply by balancing current accounts around the system. TARGET (im)balances at record level: Should we worry? [2] According to the ECB, the recent rise in TARGET 2 balances could be seen as the result of the decentralised implementation of the extended asset purchase programme (APP). The programme entails cross-border payments by the purchasing NCBs, with around 50% of involved counterparties resident outside the euro area, including the UK. These counterparties access the TARGET system via a limited number of financial centres, particularly Germany and, to a lesser extent, the Netherlands. According to the ECB, the increase in TARGET balances stemming from the concentration of cross border flows due to APP transactions would reflect technical features of the euro-area financial structure rather than evidence of financial stress. However, these imbalances recently may be well indicative of a persistent fragmentation within the euro area’s financial markets as well as uneven liquidity allocation; the risks of which may be understated. Against this background, the paper discusses what the underlying factors behind the recent rise of TARGET2 (im)balances are, and the risks associated to rising Target (im)balances for the ECB’s monetary policy.A series of separate reports from different authors on the theme of TARGET imbalances at record levels was published by the European Parliament's European Parliamentary Research Service in November 2017 |
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| Source Link | http://www.europarl.europa.eu/thinktank/en/home.html |
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| Subject Categories | Politics and International Relations |
| Countries / Regions | Europe |
