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What Germany should fear most is its own fear: An analysis of Target2 and current account imbalances

  • De Grauwe, Paul
  • Ji,Yuemei
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    This paper analyzes two claims that have been made about the Target2 payment system. The first one is that this system has been used to support unsustainable current account deficits of Southern European countries. The second one is that the large accumulation of Target2 claims by the Bundesbank represents an unacceptable risk for Germany if the eurozone were to break up. We argue that these claims are unfounded. They also lead to unnecessary fears in Germany that make a solution of the eurozone crisis more difficult. Ultimately, this fear increases the risk of a break-up of the eurozone. Or to paraphrase Franklin Roosevelt, what Germany should fear most is simply its own fear.

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    File URL: http://www.ceps.eu/system/files/book/2012/09/WD%20No%20368%20PDG%20%2526%20YJ%20What%20Germany%20should%20fear%20most%20is%20its%20own%20fear.pdf
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    Paper provided by Centre for European Policy Studies in its series CEPS Papers with number 7280.

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    Length: 25 pages
    Date of creation: Sep 2012
    Date of revision:
    Handle: RePEc:eps:cepswp:7280
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    1. Buiter, Willem H., 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
    2. Ulrich Bindseil & Philipp Johann König, 2011. "The economics of TARGET2 balances," SFB 649 Discussion Papers SFB649DP2011-035, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Hans-Werner Sinn & Timo Wollmershaeuser, 2011. "Target Loans, Current Account Balances and Capital Flows: The ECB's Rescue Facility," NBER Working Papers 17626, National Bureau of Economic Research, Inc.
    4. Westermann, Frank & Steinkamp, Sven, 2013. "On Creditor Seniority and Sovereign Bond Prices in Europe," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79848, Verein für Socialpolitik / German Economic Association.
    5. ,, 2009. "Economics of Monetary Union," OUP Catalogue, Oxford University Press, edition 8, number 9780199563234, March.
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