Is the build-up of TARGET2 balances a question of self-contained risk?

Abstract

This paper argues that imbalances in the TARGET2 payment system are a symptom of the current financial crisis and not subject to self-contained risk. Any risk for the Eurosystem ultimately arises from liquidity provision and not from the redistribution of pre-existing liquidity. If the risk element is to be reduced, the extraordinary monetary policy measures of the Eurosystem will have to be addressed and reversed as soon as possible. Especially in a monetary union of sovereign member states it cannot be the task of an independent monetary policy to reallocate solvency risks among taxpayers across the currency area. Therefore, the role of the Eurosystem in tackling the current crisis should not be overstretched. At the end of the day, it is up to the member countries and not the central banks to resolve the crisis.