Hans-Werner Sinn - The Economics of Target Balances: From Lehman to Corona

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Target balances result from previous net payment orders fulfilled by the national central banks (NCBs). They constitute claims on, and liabilities with, the Eurosystem and are mostly hidden as other items in the respective balance sheets of these NCBs. While the sum of all balances is zero by definition, the positive and negative balances alike have grown throughout the euro crisis reaching values way beyond 1.2 billion, with Germany as the biggest Target creditor and Italy and Spain as the biggest Target debtors. The development of the Target balances mirrors the course of the euro crisis.

Target is the name of an international payment system sustained by the Eurosystem. It derives its meaning from the fact that the Eurosystem is organized in a decentralized manner, consisting of a set of national central banks (NCBs) and the European Central Bank (ECB). The NCBs are owned by the respective nation states and distribute their profits to them, but they carry out the orders of the ECB Council . Target balances measure the sum of net payment orders that have been made between the countries of the Eurozone to buy goods and assets and to repay foreign debt. They are negative for a country that gave these net payment orders and positive for a country whose NCB carried out the orders. The balances are respectively booked as liabilities and assets in the individual NCBs balance sheets .

The Target balances were very small before the Lehman crisis , showing slightly negative values for countries like Belgium , Greece , Austria and even Germany , while slightly positive values occurred for countries like France , Italy and Spain . But since the outbreak of this crisis, huge imbalances arose with strongly negative values for Greece , Italy , Portugal , Spain , Ireland and Cyprus (GIPSIC), while Germany , the Netherlands , Luxemburg and Finland showed substantial or even very large positive balances. Figure .

Fig. 1.1

Target balances 2019. (Note: The external countries associated with the Eurozone ( Bulgaria , Croatia , Czech Republic , Denmark , Hungary , Poland , Romania and Sweden ) are also allowed to have small positive Target balances. They are not included in this diagram. Source: European Central Bank , Statistical Data Warehouse, ECB/Eurosystem policy and exchange rates, Target balances of participating NCBs)

The overall development of the Target balances until the end of 2019 is shown in Fig.. The sum of all positive balances which was equal to the absolute sum of all negative balances went way beyond 1000 billion. By the end of 2019, the sum was 1286 billion, where the Bundesbank alone accounted for 895 billion. The Target balances are the largest single items in some of the NCB balance sheets , often hidden under miscellaneous items, and yet, only a few people understand what they mean.

Fig. 1.2

The development of Target balances (absolute sum of negative Target balances). (Note: The graph shows the positive Target balances and the absolute values of their negative counterparts alike, if account is taken of the fact that negative balances may occur not only with individual countries but with the ECB itself while non-euro countries associated with the Eurosystem ( Bulgaria , Croatia , Czechia , Denmark , Hungary , Poland , Romania and Sweden ) are allowed to participate in the Target system with positive balances. The Target data used in this book refer to end of month. The ECBs negative balances (236 billion by the end of 2019) result primarily from the ECBs participation in asset purchasing programs. Sources: Sinn/Wollmershuser (2012), until April 2008 on the basis of a calculation using IMF Data, thereafter: European Central Bank , Statistical Data Warehouse, ECB/Eurosystem policy and exchange rates, Target balances of participating NCBs as well as Deutsche Bundesbank , Banca dItalia , Banco de Espaa, balance sheets )