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May 10, 2019

Target2 debate raises legitimate questions with unsatisfactory answers

We are more cautious than most analysts to dismiss arguments we disagree with by branding them as populist. We think the entire notion of populism deflects from the nature of the confrontation western liberal democracy is currently exposed to. Specifically, it conflates one's disagreement on the answers with the legitimacy of the questions.

This is also how we have been approaching the Target2 debate. In contrast to the majority views among monetary economists, we think it is legitimate to reflect on the widening imbalances in the eurozone's payment system, and especially on what this tells us about economic and financial sector imbalances. We disagree with Hans-Werner Sinn's more extreme conclusions, but we think it is irresponsible to dismiss those imbalances as a non-issue.

The Bundesbank has been firmly on the side of of those who say that the Target2 imbalances do not matter. And, in a conference on populism this week, the Bundesbank stepped up its criticism of the Target2 debate, by accusing its proponents of lying. As an interesting aside it was Helmut Schlesinger, a former Bundesbank president, who first discovered the rising Target2 balances, during a deep-dive into the more obscure parts of central banking statistics. His successors now have a hard time debunking what the grand master found. 

FAZ quotes Joachim Wuermeling, Bundesbank director in charge of financial supervision, that a number of assertions in the Target2 debate have been plainly wrong. First, the Bundesbank is not giving bilateral credits to third countries, the claims are vis-a-vis the ECB. It is also wrong to suggest that the German taxpayer carries a risk in proportion to the size of the imbalance. It is proportional to Germany's capital key. Germany only risked losing the entire surplus - €920bn in April - in the unlikely case Germany itself decided to exit the eurozone.

FAZ noted a comment from Clemens Fuest, Sinn's successor as the head of Ifo institute, who has been arguing that fiscal risks arise to German taxpayers in case of a severe financial crisis, even one that does not result in the formal exit of a member state. We very much agree with Fuest's assessment of hidden contingent risks from a monetary union of fiscally-independent member states. The eurozone's experience in its first twenty years has been overwhelmingly one of excessive risk-denial, rather than the opposite.

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May 10, 2019

No more German questions please

Constanze Stelzenmüller made a couple of useful observations in the FT. First, that Germany is not only under attack by Trumpians but also by liberals in the US. Then she makes the valid point that the rest of the world is as confused about Germany's role as Germany itself. The world demands German leadership, but criticises Germany whenever it leads. How does Germany's selfish support for the NordStream2 project sit alongside the decision to open the border to Syrian refugees? It is a good question, but we don't think it is the most important one.

Nor do we think much of Robert Kagan's idea of Europe as a repository of unexploded World War II bombs, ready to detonate at any time. We sometimes get the impression that the main job of speech-circuit dwellers is to find ever more outrageous metaphors with which to shock their audience, rather than to reflect deeply on the issues at hand. 

We would agree with Stelzenmüller's conclusion that Germany is not standing up to authoritarian regimes, but for us the more pertinent issue with Germany's interaction with the rest of the world is of a different category. It is the country's willingness and ability to maintain two simultaneous beggar-thy-neighbour strategies: on defence and on economics, the latter through persistent external savings surpluses. The two are more related than meets the eye: they both reflect the behaviour of a large country that acts like a niche player by not taking into account how its own actions affect the rest of the world. The real issue has nothing to do with metaphorical unexploded bombs. It is about what will happen when that beggar-thy-neighbour strategy is challenged.

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