Persistent institutional malfunctioning in the Eurozone

Abstract

Institutional change in the Eurozone is driven by the need to ensure the immediate survival of the euro rather than confronting the structural weaknesses of the common currency. The failure to deal with underlying weaknesses is demonstrated by the policy of “selective support”, whereby markets and instruments considered vital for the survival of the euro are often adopted under pressure. This type of support is most prominently demonstrated by the TARGET2 clearing system within the Eurosystem of central banks. The system allows the euro to survive but also facilitates the rise of intra-EMU imbalances, as is reflected in divergent claims and liabilities of member states, leading Germany to accumulate intra-EMU claims on others. Instability thus becomes entrenched in the Union, while Germany maintains a hegemonic position.

Keywords:

• Eurozone
• European Central Bank
• Eurosystem
• institutions
• TARGET2

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Data sharing is not applicable to this article as no new data were created or analyzed in this study.

Notes

1 CSPP: Corporate Sector Purchase Programme; PSPP: Public Sector Purchase Programme; ABSPP: Asset-Backed Securities Purchase Programme; CBPP3: third Covered Bonds Purchase Programme.

2 In the rest of this article “TARGET balances” refers to balances arising in 1999–2008, while “TARGET2 balances” refers to those occurring after 2008. Crucial for our purposes are TARGET2 balances.

3 Including flows of liquidity to France, which explains why France has maintained a relatively balanced TARGET position across time.

4 It is striking that precisely the opposite occurs in the Federal Reserve System, in which the district Federal banks have the obligation to settle the outstanding Interdistrict Settlement Account (ISA) balances every April (Koning 2012; Wolman 2013)