Several months ago, German economist Hans-Werner Sinn stirred a debate about an alleged “stealth bailout” happening in the Eurozone. According to Sinn, the Bundesbank and other central banks in the core of the Euro area secretly give loans to the countries in the periphery that come at the expense of their own banks. A number of economists and journalists (including me) have contradicted Sinns arguments.
Now, finally, the ECB itself gets involved. In its latest monthly bulletin, published yesterday, the central bank addresses the arguments of Hans-Werner Sinn. From my point of view, this analysis is at odds with Sinn’s view.
Here’s a table that compares of statements by Sinn and the ECB on the matter.
At the core of the debate is the electronic payment system that private banks use to settle cross border payments in the Euro area. This system is called Target2. (A detailed description of the system and the debate is available here and here.)
Here’s a brief summary of the key points from the ECB monthly bulletin:
- Sinn suggests that the Target2 operations come “at the expense of German banks”. The ECB, however, points out:
“It would be wrong to believe that TARGET2 liabilities that result from the provision of relatively large amounts of liquidity to banks in some countries have a negative impact on bank lending in other countries.”
- Sinn’s asserts that current design of the cross border payment system is flawed and detrimental to the stability of the Eurozone. He writes: ” It (…) leads to hefty foreign debts and undermines the ability of the ECB to influence with its interest-rate policy the economies of the countries where the surplus money is flowing to.” This is the view of the ECB:
“The distribution of liquidity within the Eurosystem provides stability, as it allows financially sound banks – even those in countries under financial stress – to cover their liquidity needs, thereby contributing to the effective transmission of the ECB’s interest rate decisions to the wider euro area economy, with a view to maintaining price stability in the euro area over the medium term. “
- Sinn suggests that there should be an upper limit on Target2 balances. The ECB asserts:
“As there can be no upper limit on the value of payment flows within a single currency area, there can be no upper limit on the TARGET2 balances of NCBs. Limiting the size of TARGET2 balances would be inconsistent with the concept of a currency union. “
- Sinn claims that similar imbalances cannot occur in the United States because the electronic payment system is designed differently. The ECB, however, writes:
“[I]n the United States, there are no limits on payment flows within the currency area formed by the 12 Federal Reserve districts. Interdistrict balances emerge from such payment flows, which are not more constraining than the TARGET2 balances are in the Eurosystem. The mechanism used in the United States to readjust interdistrict balances once a year has no influence on cross-border payment flows and essentially leads to the adjustment of the key used for the allocation of profits and losses of the US Federal Reserve System to the 12 district Reserve Banks”
Interestingly, however, the Ifo institute published a German press release earlier today asserting that there are “no factual differences” between Sinn’s view and the points made in the ECB’s monthly bulletin.