EtVentisAdversis ن 🇮🇹

On TARGET2 The fan club of the ever-hysterical Robin Brooks is coming after me. So let’s use a simple example to explain what TARGET2 actually is and how its balances arise. Suppose an Italian buyer pays €100 to a German seller. The payment goes through, but the Bank of Italy ends up with a €100 liability to the ECB. Sounds paradoxical, doesn’t it? But these are two entirely different kinds of obligations. Let's break it down. 1. An Italian transfers €100 to a German. €100 is debited from the Italian buyer's bank account. €100 is credited to the German seller's bank account. The payment is complete. The Italian buyer owes the German seller nothing. Before going further, we need to understand something about modern monetary systems. There are two types of money relevant to this example: Commercial bank deposits: the money households and businesses use to pay for goods and services. Central bank reserves: the money commercial banks hold at their central banks and use to settle payments between themselves. 2. What happens at the central bank level? The Italian commercial bank holds reserves at the Bank of Italy, while the German commercial bank holds reserves at the Bundesbank. When €100 moves from Italy to Germany, the balance sheets of the two central banks change. Here's what happens: BANK OF ITALY 🇮🇹 Reserve liabilities to commercial banks: −€100 TARGET liability to the ECB: +€100 BUNDESBANK 🇩🇪 Reserve liabilities to commercial banks: +€100 TARGET claim on the ECB: +€100 Notice something important. The Bank of Italy has not increased its total liabilities by €100. It has simply replaced one liability with another. Before the payment, it owed €100 in reserves to the Italian commercial bank. After the payment, it owes €100 to the ECB through TARGET. Meanwhile, the Bundesbank has acquired a new €100 liability to the German commercial bank. To balance its books, it simultaneously acquires a €100 financial asset: a claim on the ECB. This is precisely how the ECB and the Bundesbank explain the accounting. 3. Why can't we just transfer the money and forget about it? Because the euro is a single currency, but national central banks maintain separate balance sheets. If Italy and Germany operated under a single central bank with one consolidated balance sheet, this would simply be a transfer of reserves between two commercial banks. But since the Bank of Italy and the Bundesbank have separate balance sheets, an additional accounting entry is needed to record the movement of reserves between them. That's what TARGET does. 4. What if someone in Germany transfers €100 back to Italy tomorrow? Everything happens in reverse. The Bank of Italy's TARGET liability decreases by €100, while the Bundesbank's TARGET claim falls by €100. Assuming no other transactions, both TARGET balances return to their original positions. Here's the key takeaway: TARGET records net settlement flows between national central banks within the Eurosystem. It does not represent unpaid debts of Italian buyers to German sellers, nor does it mean the Italian government has borrowed money from Germany. And this brings us to a much more interesting question: If the Bank of Italy can maintain a negative TARGET balance indefinitely while remaining in the Eurosystem, why would it need to repay it at all? And here's the most fascinating part: Much of the enormous TARGET imbalances accumulated since 2015 were actually driven by the Eurosystem's own asset purchases under the ECB's quantitative easing programs!