The Target Balances in the Euro Area

Seminar paper from the year 2012 in the subject Economics - Monetary theory and policy grade: 13 University of Bayreuth language: English abstract: The European Monetary Union is stuck in a severe balance-of-payments imbalance. The European sovereign debt crisis which followed the financial crisis is present in the media in politics and important economists try to evaluate the situation in order to find possible solutions.This paper deals with the TARGET balances. TARGET2 is a payment system in the European Monetary Union and as will be shown the TARGET balances are a measure for the balance- of-payment deficits and surpluses in the countries of the Eurozone. The issue is interesting as there are huge differences in the current account balances of member states. To understand the emergence of the TARGET balances it is important to first look at the way a central bank creates money. This paper aims to show how TARGET balances arise when trade flows are not financed through inverse capital flows. Further on it examines the current account deficits of Greece Ireland Italy Portugal and Spain and shows how they led to tremendous TARGET2 debts of those countries. On the other hand it examines how particularly Germany to a smaller extend also Finland Luxembourg and the Netherlands accumulated high TARGET2 claims towards the Eurosystem. Further on it examines the development of the monetary bases in the Eurozone and how this affected Bundesbank money creation.Finally it deals with some concerns regarding the TARGET balances . As it is a complex matter opinions about their risk diverge. Some analysts think that they are highly problematic others don't see any risk at all. Some main ideas dealing with the risk involved will be presented in brief.