Target Debate

The Target discussion began with the first publication of the Target balance (WirtschaftsWoche, No. 8, p. 35, “Neue Abgründe” (Deep chasms)) on 21 February 2011. The German Bundesbank reacted immediately with a press release, that included the following statement: “The size and distribution of TARGET2 balances across the Eurosystem’s national banks are insignificant in terms of their risk position, which dictated by the provision of funds by the Eurosystem. TARGET2 balances represent no independent risks for individual national central banks.”

The Target analysis and the EEAGs recommendations perplexed politicians. On 23 February Prof. Sinn spoke to Federal President Wulff about the situation of European Monetary Union (and especially Target2) and explained the EEAG report to him, which presented a potential mechanism for resolving the debt crisis of EU member states. In a speech to Nobel Prize winners on 24 August 2011 in Lindau the Federal President reiterated the EEAG’s criticism of government bond purchases as a circumvention of the Maastricht Treaty.

Initial publications gave rise to fierce criticism on internet fora, which were of a very personal nature in some instances. This was notably the case of multiple attacks by Olaf Storbeck in the Handelsblatt, which spread a false and distorted picture of Prof. Sinn’s arguments and analyses in both German and English. Mark Schieritz also made several critical comments in the internet fora of Die Zeit

In March and April the Target analyses were completed by further aspects of the issue and brought into the public debate. In an article in the Süddeutsche Zeitung entitled: “Tickende Zeitbome” (Ticking time bombs; 2 April 2011) the total amounts of exposure including the Target balances of the crisis countries were calculated for the first time. He correctly assumed that liability would be distributed according to the ECB capital key, regardless of national Target claim levels. In a speech given on 22 April in front of Mario Draghi (Banca d’Italia) and followed by extensive discussions, the time line of the Target balances of Germany and the crisis countries was made public for the first time. On 4 May an article by Sinn entitled: “Die riskante Kreditersatzpolitik der EZB” (The ECB’s risky credit substitute policy) was published in the Frankfurter Allgemeine Zeitung. This article offers the first macroeconomic analysis of the Target balances and shows that the difference between the current account balance and the capital movement balance are equal. With the expression “credit substitution policy (Kreditersatzpolitik)” Sinn develops the argument that Target balances also measure the shift in loan credit within the euro area. The first public lecture given on the Target balances took place at the Humboldt University of Berlin on 9 May 2011. Sinn's presentation on Target balances at the Munich Economic Summit (19/20 May 2011) and the press conference there with Martin Wolf and other international journalists constituted another milestone. Martin Wolf took up this issue and called Sinn's analysis "brilliant" in the Financial Times (1 June 2011). The Financial Times also published the curves for the Target balances that Sinn had calculated based on the central banks' balance sheets. That was the break-through that resulted in widespread recognition of the Target arguments, even if Wolf faced heavy criticism from the ECB and the financial sector at the time. On 1 June 2011 Sinn published an article on VOX on the Target problem (“The ECB's stealth bail out”), which met with heavy criticism from Karl Whelan (Irish National Bank) and Willem Buiter (Citi Bank), to which Sinn reacted on 14 June with a second article in VOX  (“On and Off Target”), in which he showed that this criticism was based on false interpretations and obvious misunderstandings.

To scientifically support their Target theses, Hans-Werner Sinn and Timo Wollmershäuser published the working paper entitled: “Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility” on 24 June 2011 as CESifo Working Paper No. 3500, which represents a first scientific treatment of the macroeconomic aspects of the Target balances. The paper explains that Target balances are balances of payment and precisely documents the relationship between current account balances, capital movement balances and Target balances for the individual crisis countries. It is shown that Target balances constitute public credit relations in the same way as credit that is given via official rescue packages. The paper also shows the displacement of domestic capital and refinancing loans in the core countries by the external capital flowing in from the periphery countries. The relationship to the US system of Interdistrict Settlement Accounts is also explored. The paper also shows that the German Target claims represent an exposure risk should the euro break up and that this exposure would equal the total claims, and not just a share of Target exposure to the crisis countries. In this context both authors look at criticism of their Target statements to date. This in-depth analysis is also the subject of Ifo Working Paper No. 105 and the special issue of ifo Schnelldienst entitled: “Target-Kredite, Leistungsbilanzsalden und Kapitalverkehr: Der Rettungsschirm der EZB” (Target Credit, Current Account Balances and Capital Flows: the ECB's Rescue Facility).

This work by Sinn and Wollmershäuser triggered a flood of contributions on Target in the German national press and, some time later, it also provoked responses from academics (see, for example, U. Bindseil and P. J. König (2012), U. Bindseil and A. Winkler (2013) or J. Pisani-Ferry (2013)), who falsely assert that Sinn and Wollmershäuser see the Target balances as the cause of the crisis-afflicted countries’ current account deficits. The volume and scope of discussion on internet forums grew so rapidly that it can no longer be summarised.

Further milestones in the Target debate were Sinn's speeches to the CSU parliamentary faction (28 June 2011), at the Ifo Annual Meeting (29 June 2011), as an expert at a hearing before the Federal Constitutional Court (5 July 2011; guiding principles on the verdict of 7 September 2011) at the IIPF annual congress (Michigan, 11 August 2011), in the Bavarian cabinet meeting with Minister President Seehofer (19 September 2011) and to the FDP parliamentary faction (28 September 2011). The ifo Schnelldienst No. 16 dated 31 August 2011 with 16 articles on Target by authors from the academic and the professional world including former Bundesbank president Helmut Schlesinger, as well as a press conference in the Foreign Press Association club (Bundespressekonferenz Berlin) held on 12 September 2011, also influenced the public debate.

The ECB first reacted on 13 October 2011 with the article “TARGET2 balances of national central banks in the euro area” in its monthly report No. 10. In a footnote the ECB concedes that it has no separate data on Target and calculates the balances for countries, which do not directly publish their balances, just as Sinn and Wollmershäuser did in June, namely by using IMF statistics. There was effectively also a way of further refining this method by deducting the intra-Eurosystem balances that denoted the transfer of foreign reserves (P. Cour-Thimann, “Target Balances and the Crisis in the Euro Area”, CESifo Forum Special Issue 14, April 2013.

The growing controversy over the Target issue led Sinn to give further speeches firstly in his capacity as the Heinrich-Heine professor of economics (25 October 2011, University of Düsseldorf), and then to the Dutch finance minister (1 November 2011, Den Haag), at the Ifo-CoR-BrIEF Conference (9 November 2011, Brussels) and at the DG ECFIN Annual Research Conference (21 November 2011, Brussels).

The scientific foundations of the Target analysis were also further strengthened in the autumn of 2011. On 14 November a paper by E. Dor entitled: “The enormous loans of the Deutsche Bundesbank to distressed European countries’ central banks” was published in the IESEG Working Paper Series 2011-ECO-08. The author fully supported Sinn and Wollmershäuser's arguments. The CESifo Working Paper No. 3500 by Sinn and Wollmershäuser already cited above was published in the peer-reviewed journal International Tax and Public Finance in 2012. It appeared as the NBER Working Paper No. 17626 as early as autumn 2011.

The “Bogenberg Declaration”, which was the product of a discussion at a joint strategy meeting of the trustees of the Society for the Promotion of Economic Research (Friends of the Ifo Institute) and Ifo's executive board, will go down in Ifo's history books. It was published on 7 December by the Frankfurter Allgemeine Zeitung under the title “Aus Sorge um Deutschland” (Out of concern for Germany and Europe) and generated exceptionally strong (and concurring) feedback in the form of readers' letters and internet contributions. The declaration names the central causes of the currency crisis, highlights misguided developments along the path to a solution and proposes solutions that are based on the demand for a settlement of Target balances according to the US model. In the USA Target balances have to be settled on a regular basis. Were the US system to be applied to Europe, the Bundesbank would have the right to receive a settlement of its Target claims in marketable securities. By mid-2015 the Bundesbank’s Target claims totalled 543 billion euros. (Details)

On the last day of 2011, as mentioned above, The Independent recognised Sinn's contributions on these questions that are central to Europe's future by including him in its list of the “Ten People who Changed the World”, while the WirtschaftsWoche named him Germany’s most important economist.

A year after the first publication by Prof. Sinn, the Target issue hit political headlines when the new President of the German Bundesbank, Jens Weidmann, voiced his concerns over the Bundesbank’s target claims in a letter to ECB president Mario Draghi. In the letter Weidmann not only demanded higher credit rating criteria for collateral submitted against refinancing loans, but also called for collateralisation of the Bundesbank’s soaring Target claims. Weidmann wrote his Target letter after several months of silence on the part of the Bundesbank, during which it conducted extensive internal analysis of the Target issue. This letter marked a departure by Weidmann from the Bundesbank’s earlier position that Target balances represent irrelevant balances and a normal by-product of money creation in the European currency system. The Bundesbank’s initial position adopted under its former President Helmut Schlesinger, whose term in office saw the signature of the Maastricht Treaty, had attracted criticism. 

With the Target topic Sinn succeeded in defending his position against a broad range of stakeholders. Initial criticism of Sinn may have been fierce, but the recognition that he earned later was all the greater for it (see, for instance, “Ein Dickschädel” (Pig-Headed), Frankfurter Allgemeine Zeitung, 4 March 2012 or “Der Euro-Fighter” (The Euro Fighter), Die Zeit, 19 July 2012). The importance of the Target balances as a measure of internal European balances of payments financed by the ECB has now gained worldwide recognition. Mario Draghi explained to journalists that he monitors the Target balances on a daily basis. 

The Ifo Institute offers regular panel reports on the Target balances of individual euro countries (specifically in the Excel spreadsheet entitled: “Target balances of national central banks in the Eurosystem”), as well as the figures provided by the Institut für empirische Wirtschaftsforschung at the University of Osnabrück headed by Frank Westermann. In September 2015 the ECB itself started reporting on the Target balances.