What Germany should fear most is its own fear: An analysis of Target2 and current account imbalances

Paul De Grauwe and Yuemei Ji ()

CEPS Papers from Centre for European Policy Studies

Abstract: This paper analyzes two claims that have been made about the Target2 payment system. The first one is that this system has been used to support unsustainable current account deficits of Southern European countries. The second one is that the large accumulation of Target2 claims by the Bundesbank represents an unacceptable risk for Germany if the eurozone were to break up. We argue that these claims are unfounded. They also lead to unnecessary fears in Germany that make a solution of the eurozone crisis more difficult. Ultimately, this fear increases the risk of a break-up of the eurozone. Or to paraphrase Franklin Roosevelt, what Germany should fear most is simply its own fear.

Pages: 25 pages
Date: 2012-09
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Citations: View citations in EconPapers (20)

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