* If a breakup of the EZ were to materialize, this will
lead to losses for Germany, independently of the existence of Target2. * Germany could have avoided this by reducing its
current account surpluses; it refused to do so and thus the responsibility for
this risk is Germany’s, and not some obscure system like Target2. * German banks were willing to lend vast amounts of
money to peripheral countries without doing a proper credit risk analysis. No one
other than Germany itself is responsible for taking on these risks. * With or without TARGET2, the risk that arises from reckless
lending by German banks will have to be borne by Germany.
I agree with Prof. de Grauwe’s partial diagnosis but
emphasize that is indeed only a partial one. It does not speak for Prof. de Grauwe
that he only paints one (convincing) side of the picture while ignoring the
other (equally convincing) side.
The question is only: what does one do when that problem
erupts like it erupted with Greece in late 2009? Does one try to cure it by
prolonging it or would it have been better to cure it at the source? Target2
massively contributed to prolonging the problem and, thus, turning it into a potential powder keg.
From the beginning of this blog, I have argued that one
should have cured the problem at the source. In the case of Germany, that would
have meant: stop Target2-funding for Greece; have the German banks write down
their Greek claims to low market values; have them ‘beg’ for a government bail-out;
have the government save those banks which justified saving and close the
The cost to German tax payers would initially have been
similar to the cost which they have not recognized to date. However, the tax
payers would have gotten something in exchange for that. They would have gotten
temporary ownership of those banks and the hope that upon re-privatization,
they could recover some of those losses. The banks' shareholders would have been wiped
out (and possibly some bondholders, too). Prof. de Grauwe suggests that 'Germany' is 'Germany'. In actual fact, there are Germans as tax payers and there are others (not only Germans) who own German banks. Prof. de Grauwe seems to support a method where tax payers are called upon to not only save their banks but also their shareholders and speculative investors.
Target2 (and the rescue loans) made it possible that this
decision could be avoided. Thus, the deficit countries never really experienced
the type of financial crisis which a country normally experiences when it hits
external payment problems: as the funds flow from abroad stops, the current
account must be brought into balance virtually overnight. Instead, the deficit
countries could continue with their current account deficits, this time not
financed by reckless banks but, instead, by tax payers.
Prof. de Grauwe exclusively focuses on imbalances in current
accounts. He completely ignores imbalances within
the capital account. The massive deposit flight in deficit countries, which exceed the deficits in current accounts since the crisis erupted, was only possible
because of Target2. Tax payers’ money was de facto automatically transferred to,
say, Greece so that wealthy Greeks could take their money out of Greek banks.
Prof. de Grauwe might argue that this, again, is a
circular mechanism: whatever German tax payers transferred to Greece was
returned by those wealthy Greeks to German banks. Is he not aware that there are places like London, Switzerland, Singapore & Co. (none part of Target2) which also attracted a lot of Greek money?
Prof. de Grauwe completely ignores that a huge part of
commercial/financial transactions in the Eurozone took place with counterparties
outside the Eurozone. Since the Euro, Greece’s current account deficit with Germany accounted for only 15% of its total deficit. How about the other 85%?
For example, Greece’s current account deficit with Germany was in the same
magnitude as its deficit with China. Have Chinese tax payers been called upon
to contribute their fair share? They would have, had there not been the
Target2-system. Instead, the Duchy of Luxembourg became the most overexposed country (with
Target2-claims of almost 3-times its GDP). Did Luxembourg have current account
surpluses in that magnitude? Or how about Finland? How about Holland?
The relationship between current account surpluses,
deficits and cross-border lending is a bit like a chicken-and-egg process. What
comes first? If Germany had not lent to Greece, then Greece could not have
imported so much from Germany; Germany’s current account surplus would have
been smaller and, thus, its banks could not have lent so much to Greece…
Target2 did not cause the process but it certainly accelerated the problem once
the crisis erupted.
Prof. de Grauwe completely ignores one of the pillars of
finance: lending/borrowing is a joint responsibility of lenders/borrowers. The
lenders (among them the German banks) messed it up real good and they and their
shareholders (and, in consequence, the German tax payers) should have been made accountable for that.
The argument is made in some places (I hasten to add that Prof. de Grauwe does not make it!) that fast-talking foreign
bankers literally forced those loans down the throats of financially illiterate
Greeks. Similar to those fast-talking mortgage salesmen who bullied unemployed
Americans into taking up loans to buy a house. To even put such suspicions in
writing is a giant act
The decision to take up Greece’s foreign debt was taken by
a very small group of people: executives at the government’s debt management
agency, at the Greek banks and at the Bank of Greece. Direct foreign loans to
Greek borrowers are virtually not in existence. Certainly the executives at the
government’s debt management agency and at the Bank of Greece were
professionals of very high international regard. I cannot judge the competence of
the bank executives’ competence but I have to assume that they knew more about
banking than the above-mentioned unemployed Americans.
Conclusion Prof. de Grauwe is correct when arguing that Germany,
actually since WWII but specifically since the Euro, pursued an economic model
of current account surpluses (the expression “export champion” is something
which Germans are proud of). Enormous current account surpluses carry the same
risks as enormous deficits. Germany has ignored that and will, thus, inevitably
pay the price for it.
However, Prof. de Grauwe is intellectually less than
honest when he argues that this is exclusively a responsibility of Germany (and
not of Target2). Someone who robs a bank is responsible for that. If the bank
left its doors open, it, too, is responsible for that. Target2 left the doors
wide open to extend enormous current account deficits on the part of Greece
& Co. after the crisis erupted and, above all, to facilitate enormous
deposit flight. Deposit flight is natural in any financial crisis. It takes theexistence of something like Target2 to turn it into a fuse cord towards possible future economicwars.