Factoid of the day: capital flight and Target 2 imbalances

Published on RWER Blog, by merijnknibbe, July 19, 2012.

Target 2 is, more or less, the ECB credit-card of entire countries. When a country (technically: the Central Bank of a Eurozone country) is short of money, either because of a deficit on the current account which is not matched by a positive capital account or because of a surplus on the current account which is overwhelmed by a large outflow of capital the resulting shortage of money is financed by Target 2 credit.  

According to Hans-Werner Sinn (literature below), these nasty bastards south of the Alps (thank Mammon that these mountains exist!) have used the Target 2 accounts to, sneakily, finance their current account deficits. Was he right? Hmmm. He isn’t at the moment. At this point in history Target 2 deficits are used to accommodate unprecedented capital flight from southern european countries (see graph) – a clear ‘Paul de Grauwe event‘. By the way – at this moment (january-april 2012), the Italian goods trade deficit has all but disappeared. Remarkable, as Italy is the country which, contrary to countries like Greece, Portugal or Spain, did have a real productivity growth problem during the last twenty years. But as capital is fleeing the country – the change of the goods balance will not solve its problems.

(see Figure 3: Foreign Outflows and Changes in Eurosystem Liabilities) … (full text).

Links:

ECB: Homepage, on en.wikipedia;

Target 2 credit on en.wikipedia;

TARGET2, explained on Macro Exposure;

Paul De Grauwe on nl.wikipedia;

Paul de Grauwe on YouTube: short videos, videos longer than 20 minutes;

Hans-Werner Sinn on en.wikipedia.

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