The EUROSYSTEM, similar to all currency unions, has been engineered and constructed with flaws. The discrete Balance of Payments of any Country in the EURO AREA is structured only to be continuously unbalanced. EURO AREA economies forced with Financial Accounts deficits will see permanent constraints on Fiscal spending capacities, economic growth and budget balancing. In itself, the Target 2 balance construct goes against the principles of economic convergence that was part of the founding concepts of the EURO AREA economic area and the EURO.
by definition: positive TARGET 2 balances are a claim of the National Central Bank to the ECB balance sheet, while negative TARGET 2 balances are a deficit toward the ECB balance sheet, by construction, the overall TARGET 2 balance has to equal zero.
This construct makes thereby deficits and surpluses a permanent feature of EURO AREA and Eurosystem of Central Banks. However, very large imbalances of the Financial Balance of Payments for EURO AREA economies, make even more fragile the solidity of those Sovereign debt issuances. Even producing a Balance of Trade surplus that represents tiny amounts compared to the unbalances brought forward with the TARGET 2 flows within the EURO AREA. TARGET 2 Balances are not there to be cleared thereby Financial accounts deficits & surpluses are a feature. However, this explains the underlying flawed structure of the EURO. In fact, let’s assume any country would pretend to balance its Financial balance of payments Deficit within TARGET 2. How any Euro Area country could in hypothesis achieve that?
Considering that any National Central Bank in the EURO AREA can’t produce EURO, those are issued by the ECB. The only method that any EURO ARE Country would have eventually become allowing the National Central Bank to produce its Currency backed by its own Sovereign Debt.
This somehow explains the basic fragility of the EURO and the EUROSYSTEM in itself, although the TARGET 2 Balances are made to be zero-sum when netted. So, if TARGET 2 it’s a permanent feature by design of the ECB NCBs, why bother? well, for some reasons: 1) countries and economies that have DEFICITS within the TARGET 2 EURO AREA, are in particular countries with high DEBT/GDP ratio, that struggle to Finance Public spending and to balance their budgets, just because their economies and Balance of Payments are hampered by considerable Financial balance of payments Deficits toward the ECB. This feature then goes back to the ECB and the EU as a boomerang, because these unbalance then produce Sovereign Debt market instability and distress, that in the end requires Sovereign Debt Restructuring with consequential Sovereign Debt holders having to take haircuts on their Sovereign Debt balance sheets exposures. These are inherent risks within the EURO AREA and for all Institutional Investors holding EURO AREA Sovereign debt, that will have to be reflected in the Yield curve risk premium of holding EURO AREA sovereign debt.
Only to get things into perspective. This chart’s the ECB Target 2 balance of €-350 billion euro. i.e. compensating as central bank clearing for Euro Area central banks and banks liquidity asset/liabilities mismatches.