The Cross-Border Movement of Euro Banknotes and Austria’s TARGET 2 Liabilities

In the public and academic discussion on the payment system TARGET2, the high claims and liabilities of some euro area countries have mostly been associated with the financial crisis. The implicit assumption that TARGET2 balances would be close to zero without the financial crisis is both theoretically and empirically wrong, though. This study looks into the payment mechanisms that have caused the TARGET2 liabilities of the Oesterreichische Nationalbank (OeNB) to rise to a substantial level over the past ten years. The increase can be attributed to a structurally-induced inflow of banknotes to the OeNB, which is partly due to tourism but above all to the physical shipment of euro cash from countries outside monetary union into Austria. This central bank money, which comes to Austria as cash, leaves the country in cashless form, causing an equivalent increase in the OeNB’s TARGET2 liabilities. Structurally induced in- and outflows of central bank money (in cashless form or as banknotes) can be observed in other euro area countries, too. Understanding these flows is essential for a correct interpretation of TARGET2 balances during and after the current crisis.