domingo, setembro 17, 2017

Eurozone and TARGET 2 imbalances - Neither a lender nor a borrower be ?

The sustainability of a monetary union, with its limited or nearly non-existent adjustment mechanisms,  is predicated on reversion to equilibrium over time. Imbalances in trade and capital flows among the member need to be kept small in absolute terms., and average out close to zero over time.

That worked  in the Eurozone until 2007, with a small but very important "snag": the tendency toward equilibirum has to be achieved in both the good & services account AND in the capital account separately.   Compensating large and growing imbalances  in the trade accounts with "vendor financing" from the net exporters, as occurred since the Euro was created, accumulates growing net debt/net asset positions among the trading partners, which are ultimately unsustainable.

Cumulative imbalances can be reduced, with lower annual imbalances in the trade account as net importers  back and net exporters both cut back.  Or the imbalances can be shifted around among the participants and trading partners.  To say that the "BIS Admits TARGET2 Is A Stealth Bailout Of Europe's Periphery", the borrowers,  as Zero Hedge does, overlooks the basic reality that all imbalances are, at their root, bilateral, and that relief provided by a third party (the Central Banks) to borrowers, also represents a relief to its creditors.

The transfer of the trade and capital imbalances from individual borrowers and lenders to their respective Central Banks, as has been reflected in the TARGET 2 imbalances since 2008, does NOT change the nature  or the unsustainability of the trade or capital imbalances.

It only masks more serious consequences of persistent trade and capital imbalances.
For a short time....

Mariana Abrantes de Sousa 
Economist, UC Berkeley  *73, Princeton *75

TARGET 2 imbalances unsustainable 

Sources: Billy blog on Mario Draghi uses TARGET 2
Zero hedge on TARGET 2 
TARGET 2 for Dummies

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