TARGET 2 and the Risks for the National Bank of Slovakia

By Stískala, Jozef | The Polish Quarterly of International Affairs, July 1, 2014 | Go to article overview

TARGET 2 and the Risks for the National Bank of Slovakia


Stískala, Jozef, The Polish Quarterly of International Affairs


The current EMU is based on three constitutional rules: the absence of shared responsibility for public debt, a strict no-monetary financing rule (Art. 123 Treaty on the Functioning of the EU) and the prevailing interdependence of the public and banking sector. Each government is responsible for its debt, and according to Art. 125 TFEU, a Member State shall not be liable for the commitments of the central governments or other bodies of another Member State. The existence of these tenets makes the EMU unique and creates a new trilemma1 because strengthening the competences of the European Central Bank (ECB) or the formation of a fiscal union would be qualitatively a step forward towards a readjustment of these rules. This would reshape the scope of the EU.

Before the birth of the euro, economists and political scientists held a fervent debate about the sustainability of the prospective common monetary union. Excepting the theory of an optimum currency area, which will not be addressed here, prior to entering the third phase of the EMU, which started on 1 January 1999, doubts began to emerge about the architecture of the system for the settlement of payments between Member States. On the one hand, there was the sceptical view of the euro held by Walter Eltis2 and Martin Feldstein, and the opposing view of Peter Garber,3 on the other hand. Eltis argued that the monetary union would not survive long because of tensions arising from the different economic cycles of the Member States' economies. A monetary union, he argued, thus would fall apart when a creditor country in the system ceased accepting its task. Garber argued that if there were a crisis in the euro area, it would be shown in TARGET balance (Trans-European Automated Real-time Gross settlement Express Transfer system; and since 2007, TARGET 2). Thanks to TARGET, central banks would provide credit to themselves if there were uneven cross-border flows of funds among eurozone Member States and the ECB may be forced to ease its monetary policy to prevent the bankruptcy of a Member State.

The recent banking crisis, though, may cause the Eurosystem4 to significantly intervene to defend the consistency of the monetary union. Garber reiterated his view in 20105 when it became clear that the crisis was causing a problem for the European economy. This motivated professors Hans Werner Sinn and Timo Wollmershäuser in 2011 to develop the first comprehensive study on TARGET 2.6

The objective of this paper is to clarify the real impact of the TARGET 2 imbalances that emerged for the eurozone as a whole and reveal its consequences for the National Bank of Slovakia. The main aim of this study is to try to finally close the discussion among well-known European economists about the real effects of disproportional flows of funds (in central bank money) between eurozone states. Opinions on this issue have been amended a few times and we should first make clear whether rising TARGET balances are accompanied by increasing risk for the stability of the monetary union. We understand the term "risk" to mean the prospect of loss. After introductory remarks on the fundamentals of payment settlement via a correspondent bank and via a payment system, we will review the conclusions of specialists discussing the problem of payments. These diverse outcomes also motivated the author to exhaustively specify the risks to the eurozone as well as the National Bank of Slovakia. That is why we analyse the fundamentals of payments in the first place. After closing the debate with a prospective loss analysis, we dismantle the real implications of imbalanced payments, evaluating the experience of the National Bank of Slovakia.

Before moving on to specific political and economic problems that accompany the TARGET 2 system and tracing the monetary policy of the ECB, we will briefly show how this system for settlement of payments in the eurozone works.

Payments in the Eurozone

One of the fundamental objectives of the European System of Central Banks (ESCB) is to promote the smooth operation of payment systems. …

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