Thursday, April 19, 2012

TARGET2 - Irish & Greek farmer's tractors from Germany

The audio I posted on this site yesterday on the TARGET2 imbalances give an example of the Bundesbank having a surplus as a result of a transfer between the Irish Central Bank and the Bundesbank resulting from an Irish farmer buying a German tractor.

Later it is implied that the Bundesbank has now accepted as a liability an imbalance in respect of a similar purchase in the past by a Greek farmer. Hence one must presume the reason for the present importance attached by the Germans to the Greek situation being a unique and once off event, effectively a default in all but name.

TARGET2 only works, it seems to this non-economist, if EMU is certain to survive, hence I guess the reason for the conclusion of Ambrose Evans-Prtichard's column today, linked here, as follows:

I suspect that the realities of the eurozone have reached a point where only two options exist:
1) The folding together of the eurozone states, with a debt pool, shared budgets, joint taxation, and fiscal union. In other words, the nation states must abolish themselves (leaving only the shell), and Germany must cease to exist in any meaningful form. This was always the inherent logic of EMU. We are coming close to the moment when it must be decided.
2) The system blows apart. From a German point of view, Target2 means if the deed were done "twere better it were done quickly". Perhaps very quickly.

I have added a new link to more information on Target2 to yesterday afternoon's audio posting.



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