CESIfo: Bogenberg Declaration

A reader alerted me to this, which apparently is not a joke. For a horrible moment, I thought there was going to be ninety five theses but mercifully, the “people who count themselves friends of the Ifo Institute” limited themselves to sixteen.

Anyway, happy Christmas to one and all, even the friends of the Ifo Institute.

79 replies on “CESIfo: Bogenberg Declaration”

A reader alerted me to this…

Yes, I thought this would interest you!

H.W. Sinn and his group of policy influencing friends are no exception, they are the rule, and reckless, in deed is just the first name.

Wishing all of you a peaceful time.


@ Karl

“4. Since autumn 2007, long before the official bail-out initiatives began, some of the crisis-hit countries have replaced dwindling private capital imports with their money-printing presses (Target credits).”

Huh? This is just weird.

The Gruhwein must have been flowing freely when this sentence was drafted

If Germany is deemed to be too cheap and its current account surplus too high, it is necessary to let the credit-driven boom taking place in Germany after the crisis run its course instead of risk destroying it by forcing out, with public assistance, the capital that is now reluctant to leave Germany, or even to ruin Germany as an investment location through EU-mandated domestic wage increases.

this is intellectual bindweed, pernicious, strangling all before, apparently resistant even to the strongest arguments against it ( take a bow Karl) , and perhaps should be treated the same. What is the intellectual equivalent of Pathclear.

… from the original

This declaration was published in full on the editorial pages of the Frankfurter Allgemeine Zeitung on 7 December 2011.

Roland Berger, Chairman of the Friends of the Ifo Institute (Honorary Chairman, Roland Berger Strategy Consultants GmbH)
Aldo Belloni, Deputy Chairman (Member of the Executive Board, Linde AG)
Eckhard Cordes (Chairman, Metro AG)
Wolfgang Sprissler, Treasurer (Former Executive Board, HVB)
Jürgen Hofmann (Secretary General, Wirtschaftsbeirat Bayern)
Dirk Ippen (Newspaper Publisher, including Münchener Merkur)
Fritz Kempter (Attorney, President of the Association of Independent Professionals in Bavaria)
Meinhard Knoche (Executive Board member, Ifo Institute – Leibniz Institute for Economic Research)
Michael Kozikowski (Member of the Board, KPMG AG Auditors)
Klaus Mangold (Internationale Wirtschaftsberatungsgesellschaft mbH)
Georg Milbradt (former Minister-President, Saxony; Technical University Dresden)
Alexander Rittweger (CEO, Loyalty Partner GmbH)
Dirk Rossmann (CEO, Dirk Rossmann GmbH)
Dieter Soltmann (former President, Wirtschaftsbeirat Bayern)
Hans-Werner Sinn (President, Ifo Institute – Leibniz Institute for Economic Research and LMU University of Munich)
Heinz Hermann Thiele (Chairman of the Supervisory Board, Knorr-Bremse AG)
Peter-Alexander Wacker (Chairman of the Supervisory Board, Wacker Chemie AG)
Georg von Werz (Chairman of the Board, Pramerica Real Estate International AG)
Otto Wiesheu (President, Wirtschaftsbeirat Bayern)
Manfred Wittenstein (Chairman of the Board, Wittenstein AG)
Ewald Woste (Chairman of the Board, Thüga AG)

We use the term “money-printing press” here as a metaphor only, as the international money flows booked through the Target system are, of course, not to be interpreted as physical flows. Also, terms like “money shredding”, “overheating of the printing press” and so on are mere metaphors to provide a reasonable heuristic for complicated booking phenomena. For details see, Sinn and Wollmershäuser, “Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility,” CESifo Working Paper No. 3500, June 2011, and Sinn and Wollmershäuser, “Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility,” NBER Working Paper No. 17626, November 2011.

Shocking. This Ifo Group is free-riding on the Aesthetic Turn in Irish Economics; as per usual, Sinn allows no mention of critiques of his catoesque meanderings, and a downgrade might even be in order for the NBER peer-review processes.


@David O’Donnell
From the list above:

Michael Kozikowski (Member of the Board, KPMG AG Auditors)

Really. Enough to lose the nice the very very well remunerated NAMA work that KPMG get.

I’m tempted to refer to this as a modern version of “the big lie”? but bloody Godwin ruined it for everyone!

I wonder do those companies know that their CEO/Chairmen are hitching their horse to the breakup of the euro?

Are target imbalances the 21 century version of indulgences.?
I see the former treasurer of HVB is on the list. Was he there when it took over Depfa?

Consider the UK, where they also have jingoistic ‘little Britain’ style people : such folks get nowhere near power and are laughed at.

Germany has a very poor history of giving power to jingoistic demagogues – and as much as we should be mindful of the ‘Club med’ profligates – we need to keep a close eye on Germany


the €500 bill shelled out during the week are the modern version of indulgences. Get with the project!

$1m in $100 bills – around 10kg – exceeds economy class hand luggage limits , hence you have to travel business class. or you could convert the cash into €500 notes, which would weigh just 1.43kg.

the final line is so telling as in their interest

“Countries that are not competitive enough to repay their foreign debts should, in their own interest, leave the Monetary Union”

Damn the modern world. It is near impossible to nail 16 theses to a metal door at the ECB.

The Economist have a very interesting article on How Luther went viral.

I look forward to the deluge of pamphlets, ballads and woodcuts on Target 2 imbalances that is sure to follow. They certainly had a nice line of insult and vitriol in the 16th century that set quite a high standard, and that should be an inspiration to those that follow in their footsteps. Perhaps continental readers can alert the Irish if songs are now being sung in taverns across Central Europe that are the modern day equivalent to

Now we drive out the pope
from Christ’s church and God’s house.
Therein he has reigned in a deadly fashion
and has seduced uncountably many souls.
Now move along, you damned son,
you Whore of Babylon. You are the abomination and the Antichrist,
full of lies, death and cunning.

A Very Merry Christmas to one and all.

A Christmas Quiz!

This year Richard Tol lectured us all on taking the best economic advice available, and linked the notion of ‘best’ to Repec rankings.

So can you – without googling – put the following economists in order? All are from the top 5% and I have listed them alphabetically.

Paul Krugman
Philip Lane
N Gregory Mankiw
Kevin O’Rourke
L Randall Wray
Kenneth Rogoff
Joseph E Stiglitz
Richard SJ Tol
Karl Whelan
Hans Werner Sinn

In the event of a tie:

Who is the number 1 ranked economist?
Who is the leading female economist and where does she rank?

The winner gets two tickets for ‘Tiny Plays For Ireland’, produced by Fishamble at Project Arts Centre, next year.

You can email answers if you wish to my email, via the Fishamble website.

@ All

Sinn and his merry band clearly have a political agenda which makes it impossible to deal with their stance solely in terms of economic analysis.

This, in itself, is not all bad as it was not possible until the recent past for respectable opinion in Germany to be openly euro sceptic (the heavy lifting in this area being left to the constitutional court). The change is part of normal political development and underlines that Germany is, what it has been for some considerable time, a normal functioning western democracy.

This is best illustrated by drawing attention to the counter party to German euro scepticism in the UK which hardly raises an eyebrow.


It may also be noted that the pamphleteers actually concede the position of the Bundesbank in the sense that they do not deny the obvious facts that, in the event of a default, the cost would be shared between the remaining euro countries and would not fall solely on the shoulders of Germany and in the event that the euro collapses – although they do not concede this directly – no one really knows what would be the outcome of the negotiations between countries to share out the pain of the resulting financial chaos.

Their polemic also underlines what would be obvious even to a blind man; the crisis is one of trade imbalances between the countries of the Euro Area with the surpluses now being financed indirectly by the creditor countries because of the breakdown in the banking system or “strains” as the Bundesbank would refer to them. The solution has to be to correct the cause of these strains, not to wreck the machinery for financial transactions involved.

But the authors of the polemic are, in fact, blind. To take but one example; the view attributed to Lagarde – which I do not think is correct – that she was seeking an increase in wage levels in Germany. They say; “It is definitely not any government’s job to intervene in the price and wage structures of a market economy, because this distorts the steering function of prices and wages”. But this is exactly what the German government has been doing and more extensively than in many other countries due to the draconian reforms of the non-organised sectors of the labour market and stepping in, through financial support for short-term working, in the nominally totally independent “price and wage structures” of a market economy (which also, apparently, are inviolable under the constitution).

However, all is not gloom. There is ample evidence that people of common sense in Germany recognise that events are getting out of hand and that the attempt by France at marginalisation of the UK, in which Merkel seemed to participate, is an error which may be viewed in retrospect as an historical turning point if not corrected. Even the FDP, at 2% in the polls, and that would normally draw its support from the business community, some of whom evidently share the views of Sinn, has woken up to the fact that going the euro sceptic route is a dead end. We will see what the New Year brings!

Finally, the levels of probity in the conduct of government and business in Germany, while not in the top league, would put other countries in Europe to shame. For example, the President of the Federal Republic, Wulff, is in deep political trouble because of his acceptance of a cheap loan (“dig out anyone!”) from a friend and party supporter and it is unclear whether he will survive. His nomination was another inspired decision by Merkel.

Happy Christmas to all!

I have to admit my eyesight isn’t perfect and I don’t see what the blind man sees: That the crisis was caused by trade imbalances.

What I see is a crisis caused by banks lending out money to nations, people, companies who can’t pay it back. If the banks had been allocating capital efficiently then they wouldn’t have made so many bad loans.

The obvious solution to the problem of incompetence in the banking industry is to allow rule of law and market economy work – Resolution schemes for failed banks.

@ Gavin Kostick,

very nice of you, and yes, as a matter of honor, no Internet search!

As I am no economist, two of them, Mankiw and Wrav, I never heard about, which makes an educated guess impossible for me, so I place them randomly. 🙂

Paul Krugman (2)
Philip Lane (9)
N Gregory Mankiw (6)
Kevin O’Rourke (8)
L Randall Wray (4)
Kenneth Rogoff (3)
Joseph E Stiglitz (1)
Richard SJ Tol (10)
Karl Whelan (7)
Hans Werner Sinn (5)

Have a peaceful time and a most creative 2012!


<iWho is the number 1 ranked economist?

Stiglitz? Probably not anymore….

Who is the leading female economist and where does she rank?

That is very good, I know …. zero, nada, zilch. 😉

+1 Jesper.

If the existing laws are inadequate, formulate new ones. That is why both legal and constitutional arrangements evolve. There are no self-evident truths, there are provable and improvable truths, at least where law is concerned, perhaps also economics…

The Euro is the established church of the EU, and its unconditional supports of the banks over the people are the indulgences of our time.

The comparison to Luther’s 95 theses is not an idle one. The continent is in need of a financial reformation, to displace an unresponsive, unaccountable, increasingly corrupt and despotic economic clergy.

I hope this is the beginning of a rollback; a rollback of the euro/banking putsch of EU in recent years. People and nations must take back control of their own economies, and their own futures.

@ Georg R Baumann

Well done for having a go Georg.

I’m afriad although the pattern of your answer is fairly sound, you only have 2 in the right place.

Still, that means if anyone else feels they can beat 2, they have a chance to win two tickets to what I think (and hope) will be a theatrical highlight of 2012.


🙂 I never followed x-factor either, hence would get it equally wrong, no doubts, and hey if no one should beat me, wouldn’t that be a joke, I am happily donating my ticket to the next one in line and closest to Dublin, I am too far of the beaten track for that kinda thing, and I dislike Dublin like Detroit.

pax tecum

OK, so it is clear from the IFO newsletters, especially the TARGET2 primer, that many of these people are boors, but I still think they are essentially correct. Specifically, I think that they are right that:
(1) Germany is (effectively; ie via the ECB) lending to payment deficit countries through TARGET2 in a way that had attracted little public attention before Sinn.
(2) Germany stands to lose, through its large ex-periphery share of the ECB, a substantial amount of wealth if one of the payment deficit countries defaults, and is even exposed to a total loss of its TARGET2 claim if the eurosystem simply disappeared.

Instead of his increasingly bald rejections of Sinn’s views, I think it would be helpful if Karl Whelan set out rigorously his own idea of how TARGET2 works, and why he apparently does not think that Germany’s growing exposure is a problem for them. I make no apology for saying that I think that anyone who does go sufficiently deeply into this subject to proactively make their case, as opposed to reacting to others, will realise why Sinn is basically right (although I do think Sinn originally missed a key point of the story which I explain in my blog post).

And by the way, one reason why I chose to be anonymous when I started blogging was that I wanted my arguments to be considered on their own merits rather than in the light of my reputation. I have no problem with letting Karl Whelan know my name if anonymous comments trouble him so much.

@ Anonymous Rebel

“Instead of his increasingly bald rejections of Sinn’s views, I think it would be helpful if Karl Whelan set out rigorously his own idea of how TARGET2 works, and why he apparently does not think that Germany’s growing exposure is a problem for them.”

Pretending someone hasn’t responded to you, when in fact they have done so in depth, is a classic (and annoying) rhetorical device. I’ve written plenty about this. I’ve explained repeatedly why Target2 credits are not “loans to the periphery” and provided a long discussion of why even the extreme scenario of a Euro breakup, the loss of the Target2 credit should be at the bottom of German citizens list of concerns.

Your approach — repeating that if people think about this long enough, they’re bound to agree with you — risks coming across as a boor yourself, albeit an anonymous boor.

You are missing the point, Karl – I am suggesting that you offer a complete story yourself rather than reacting to other peoples’ arguments, including mine. Sinn made the mistake of associating the TARGET2 imbalances too strongly with trade deficits, and Tornell and Westermann tried to scaremonger about the Bundesbank having to sell gold or stop accepting outward payments from the payment deficit countries, so it was easy to find some fault with their analyses, but I think that your reactive approach meant that, inadvertently perhaps, you did not go into detail on the key arguments such as represented by my points 1 and 2 above.

In fact, you are doing it – being woolly – again: Strictly, I can agree that TARGET2 credits are “not loans to the periphery”, because they are intermediated by the ECB, but you are not making clear whether you disagree with my point 1. If in eurozone breakup “the loss of the TARGET2 credit should be at the bottom of Germans’ list of concerns”, does that mean that you disagree that Germany would sustain a loss of hundreds of billions of euros (ie my point 2)? Or are you saying that you consider other concerns to be even more important.

I am sorry if you find my tone patronising. But is “I have dealt with these arguments before, I don’t have time for this” any better?

Rebel, I’m sorry if you think I’m wolly. On point 1, I really don’t see how I could be much clearer short of capital letters and exclamation marks: No, the Target2 credit does not represent Germany lending to the periphery — can I be clearer than that?

On potential losses due to a Euro breakup, I discussed all of this at length here in the original post and follow-up comments


Apparently you don’t like my position. Fine. I’ll get over it.

It’s Christmas and I’m spending time with my family. For now, I’m not going to spend any more time explaining my position to you.

Yes, you can be clearer. I am trying to establish whether you can agree to the proposition that Germany is lending INDIRECTLY to the periphery via the ECB. In short, do you disagree with my point 1 above? I presume you still disagree with point 2?

Look, these are not matters of opinion; somewhere in an understanding of the payments mechanism and its interaction with monetary policy implementation lies the right answer, provided that we are asking the same question of course. And we should be able to get there by an iterative process of resolving progressively more detailed points until we reach agreement. Whether I like your position or you like mine is of little importance.

I can of course wait for your reply; I don’t expect you to engage in debate over the Christmas holidays. Season’s greetings to you and all readers.

Karl’s statement that “the Target2 credit does not represent Germany lending to the periphery” quite clearly contradicts your claim that “Germany is (effectively; ie via the ECB) lending to payment deficit countries through TARGET2.”

Have to admit the Sinn, Rebel.. et al points escapes me. It seems to me to boil down to this.
Somehow it would be better for Germany if the Irish, the Greeks, the Spanish and the Portuguese imported their goods from somewhere other than Germany. Is this correct – and would that resolve the imbalances in the Target system?

Amac, if the Irish, the Greeks, the Spanish and the Portuguese paid the Germans in dollars or sterling Sinn’s anxiety would presumably be much reduced (though he might start to fret about the US and UK clearing systems). If, in addition, the Germans paid for their imports in euros that would shrink their TARGET2 claims. Sinn should be happy as a clam.

But getting the man to admit that his argument has such bizarre implications would be difficult, I’m sure. He may be a crank but he’s not stupid. He can see a reductio ad absurdem coming quick enough to duck.

@ All

Sinn clearly has an agenda but, as Kevin Donoghue points out, he is smart enough to get out of the way of the absurd conclusions that can be drawn from his reasoning.

However, while he is confusing the thermometer with the fever, the thermometer still tells us that the patient is ill. Indeed, the Bundesbank does not shy away from this or from the reliability of the thermometer although one must have doubts about its view of the value of the collateral accepted by the ECB.

“In EMU, a claim in TARGET2 does not, in itself, reflect the relevant NCB’s exposure to financial risk. The risk exposure of the central banks forming the Eurosystem (i.e. the NCBs and the ECB) relates to the monetary policy operations themselves, not to the associated TARGET2 balances. As always, a central bank faces counter-party risk when implementing monetary policy. The risk associated with the provision of central bank liquidity as part of the implementation of monetary policy is mitigated by a risk management framework. The Eurosystem’s collateral framework is based on a public list of securities fulfilling the relevant eligibility criteria, together with risk control measures. In particular, securities pledged as collateral are valued on a daily basis, at market prices (where available) or using conservative valuation methods, with haircuts also being applied. The residual risk associated with the provision of central bank liquidity that
may emerge despite the risk mitigation measures, is, as a rule, shared among the NCBs of the Eurosystem in accordance with their respective shares in the ECB’s capital and is not related to the TARGET2 positions of individual central banks”. (pages 40 and 41 of Bundesbank report linked above)

The Bundesbank also deals with some of the other central claims by Sinn and his supporters.

“As a result of the financial crisis, private money is no longer flowing into the banking communities of those countries in quantities sufficient to compensate for their payment outflows. Access to the interbank money market is impaired and cross-border loans to these countries have
dried up, while previously received loans need to be repaid. In addition, banks’ funding tensions are being exacerbated by capital withdrawals of the private sector. The ensuing net payment flows out of those banking communities settled in central bank money result in their respective
NCBs displaying, in cumulative terms, liabilities in TARGET2. At the same time, the NCBs of countries which are net recipients of those payment flows display claims in TARGET2”. (Page 38).

On the supposed impact on availability of credit in Germany.

“It would be wrong to believe that TARGET2 liabilities that result from the provision of relatively large amounts of liquidity to banks in some countries have a negative impact on bank lending in other countries. Rather, banks in countries where the NCB displays a positive TARGET2
balance (see Chart C, middle panel) tend to be recipients of cross-border payment flows from other countries. Banks in such countries need less central bank liquidity than would otherwise be the case in order to continue lending to households and firms in their economies.”

On the settlement issue.

“The mechanism used in the United States to readjust interdistrict balances once a year has no influence on cross-border payment flows and essentially leads to the adjustment of the key used for the allocation of profits and losses of the US Federal Reserve System to the 12 district
Reserve Banks”.

I do not think that the arguments advanced by Sinn carry much weight any longer although Martin Wolf, surprisingly, seems to find some validity in them. One would assume that this is because it lends support to his general and, in my view, correct thesis that the crisis of the euro is one of commercial imbalances, now greatly exacerbated by a near complete breakdown in confidence in the European banking system leading to capital flight in an increasingly limited availability of directions.

@ RebelEconomist

I agree with the general position that you adopt with regard to how the debate should be conducted. I doubt, however, that there can be an agreed outcome simply because the two sides are discussing unrelated matters, the first the correct technical understanding of how the Target 2 system works, the second an inaccurate – probably deliberate – assessment of it as an element in a crisis which would exist with or without it.

@Gavin, Martin Wolf goes wrong here:

An obvious question is whether such a system of monetary financing is inherent in a monetary union. The answer is: no. The paper argues that such imbalances do not accumulate in the US, because regional members of the Federal Reserve System are forced to settle their accounts in assets they cannot create at will. Of course, doing so in the eurozone today would force governments in the vulnerable countries into bankruptcy, since they do not possess such assets in the requisite scale. Alternatively, they would have to be financed openly via transfers.

[my emphasis]

The ECB discussion I linked to makes it clear that the US and EZ systems are analogous.

@DOCM, I think that’s the ECB you’re quoting, not Buba. It wouldn’t surprise me if there are subtle differences in doctrine.

@ Kevin, Karl, DOCM, etc

Then as this argument is taking hold like bindweed, then I wonder if it’s worth Karl’s while writing a more public response such as for the Irish Times – otherwise it will become accepted common knowledge and very difficult to shift.

@Kevin Donoghue on December 27th, 2011 at 7:38 pm

I see nothing in that ECB piece that contradicts the proposition that Germany is (effectively; ie via the ECB) lending to payment deficit countries through TARGET2.

Can you tell me where you think it does please? (I suspect that you are really addressing a different point)


I don’t suppose Karl Whelan’s efforts will be any more or less energetic as a result of our urging him on. It’s surprising that Sinn and Wollmershaeuser got as far as an NBER working paper with this, but since they did the weedkiller is going to have to be pretty strong stuff. An Irish Times piece won’t kill it.

I have mixed feelings about all this. In principle, faulty ideas ought to be discouraged. But EMU isn’t working and the least damaging way to break up the EZ would be for Germany to reintroduce the D-mark. If Sinn’s peculiar thinking helps to bring that about Europe’s unemployed may have reason to be grateful to him.


In saying that the ECB’s discussion seems to me to settle the issue, I wasn’t referring to your concerns particularly. As to those, all I will say is that the statement “Germany is (effectively; ie via the ECB) lending to payment deficit countries” is neither more nor less true than the statement “New York is buying wine from California via the Fed.”

Amac / Kevin Donoghue

Yes, if the Greeks etc imported from elsewhere, the German TARGET2 surplus would stop growing, but I would not expect the German exporters to like that, because they do not see, and have a relatively small share in, the problem for Germany’s public sector building up at the central bank.

Paying in sterling etc taken out of Greece’s forex reserves would also do the trick, but not if Greece had to buy sterling by selling euros to, say, a British bank that held a euro correspondent bank account with a German or Dutch bank (page 39 of the ECB piece).

@ RebelEconomist

In the matter of trading with Greece, some of the more curious features of doing so have to be borne in mind e.g. the scandal involving Siemens.


Another factor to be considered is that Greece has a defence sector totally disproportionate to the country’s needs (because of a presumed major threat from an NATO ally i.e. Turkey). The arms industries of the major European countries are not much concerned about this. Germany’s exports in the armaments sector now exceed two billion euros annually. Many of these exports are funded through various export credit arrangements, maintaining employment in armaments industries for some reason being viewed as “a good thing”.


In short, the image of international trade made up of myriad honest traders guided by the invisible hand is a myth and especially within the Euro Area since its inception.

“Yes, if the Greeks etc imported from elsewhere, the German TARGET2 surplus would stop growing, but I would not expect the German exporters to like that, because they do not see, and have a relatively small share in, the problem for Germany’s public sector building up at the central bank.”

No I don’t suppose they would – nor would the German banks be too happy if the flood of of deposits from the GIPS Sinn talks about, dried up or reversed. I would have thought this flow is benefitting the Germans at the expense of the countries the deposits are fleeing including Ireland – so his complaints just appear perverse.


I doubt whether the German banks are so pleased to receive incoming deposits as you suggest. As it is, they seem to have too much liquidity, judging by the fact that they are repaying their refinancing loans from the ECB.

re link

The bottom line, then, is that a transfer union already exists. It is run by the ECB and is about to get a great deal bigger. The questions are whether it should be allowed to endure and, if not, what should replace it. Hans-Werner Sinn, has a clear answer: no.

Yes. A transfer union already exists. Several transfer unions in fact.
1. An unfettered capital flight ‘transfer union’ to Germany.
2. An unfettered bond purchase ‘transfer union’ to Germany.
3. A German /ECB grande theft ‘transfer union’ to private Irish banks so that German and other Euro banks gets paid.
4. A German /ECB grande theft ‘transfer union’ to private Irish DEAD banks so that German and other Euro banks gets paid.

@Kevin Donoghue

Interesting point.

I have mixed feelings about all this. In principle, faulty ideas ought to be discouraged. But EMU isn’t working and the least damaging way to break up the EZ would be for Germany to reintroduce the D-mark. If Sinn’s peculiar thinking helps to bring that about Europe’s unemployed may have reason to be grateful to him.

A breakup is in Ireland’s interest and the least damaging for everybody else except Germany would be for Germany to introduce the Dmark.

So we should not expect it to happen that way. Sinn’s article and the IFO agenda is propaganda to keep the pressure on the peripherals to leave so that Germany will not have to leave first.

This is an economic war and Ireland is losing the propaganda battle.

“I doubt whether the German banks are so pleased to receive incoming deposits as you suggest. As it is, they seem to have too much liquidity, ”

It’s all a bit like the bloated landlords expecting sympathy from the starving peasants about the discomforts of overeating. Talk about rubbing salt in.


I would counter with a different analogy. The Germans are like Noah, who was ridiculed for building his ark in fine weather, and then begged for help when the rain came and he already had all the creatures on board that he had provided for.

Well that is pretty much the same thing – those on board the ARK are obviously better off than those facing the deluge. Probably the bloated landlord felt the same complacency about his food provisions during the famine.


At the moment my 8 year old German made is giving trouble. The vacuum assist on the brake fails intermittently. My excellent mechanic tells me that the brake vacuum assist gives trouble on many German models, Passat, Audi etc.

I may have to replace the car sometime in 2012, if I can afford it. In choosing I will be certain to avoid adding to Prof Sinn’s Target2 imbalance.

@Joseph Ryan

I agree that reintroducing the D-mark is not in Germany’s interest, but if Sinn wins enough converts it could happen. Imagine you’re a German who believes the Sinn Doctrine, i.e. TARGET claims are loans going bad and the more they grow the less the chance that Germany will ever be repaid. Would you not conclude that the best thing to do is cut your losses now and exit the EZ?

I’m practically certain that Karl Whelan is right and the Sinn Doctrine is just a mistake, but it may yet help put an end to EMU, which has proven to be a much more serious mistake.

@Kevin Donoghue

I agree that Sinn is pushing Germany towards demonising peripherals and deliberately or otherwise bringing the euro closer to the edge.
His calculation is that the propaganda will force the peripherals out and that a core euro area will remain. That is a scenario that would please Germany.

The risk of course is that he will precipitate euro collapse in which Germany would be by far the biggest loser, not through any residual Target2/ECB loss but through loss of trade following massive currency revaluation.

Either way, Ireland’s interest is in the collapse of the euro rather than a singular Irish messy exit from it.

@ All

As a penance, I have tried to plough through the Sinn paper. What strikes one as immediately is the following extract (page 5).

“Other statements by the Bundesbank and, in October 2011, by the ECB followed. In essence, the banks said:

1. The Target balances are a statistical item of no consequence, since they net each other out within the Eurozone (Bundesbank).

2. Germany’s risk does not reside in the Bundesbank’s claims, but in the liabilities of the deficit countries. Germany is liable only in proportion to its share in the ECB, and if it had been other countries instead of Germany that had accumulated Target claims, Germany would be liable for exactly the same amount (Bundesbank and ECB).

3. The balances do not represent any risks in addition to those arising from the refinancing operations (Bundesbank and ECB).

4. A positive Target balance does not imply constraints in the supply of credit to the respective economy, but is a sign of the availability of ample bank liquidity (ECB).

All points are basically correct (and do not contradict what we said in previous writings), but they hide the problems rather than clarify them and deny the fundamental distortions in the euro countries’ balances of payments which, as we will argue, are precisely measured by the Target balances”.

If this is the case, what is all the fuss about?

It is clear that the ECB is providing liquidity to compensate for the fact that there is a lack of confidence – to which Sinn and his supporters have contributed a great deal – in the banking systems of the peripherals and that the Target 2 balances do provide a good indicator of the strains in the euro system. But this point is already conceded.

That balance of payments difficulties are at the heart of the euro crisis is at this stage, it seems to me, irrefutable.

We must wait and see what further insights occur to Martin Wolf (which he has promised to provide).


So ECB\Buba “deny the fundamental distortions in the euro countries’ balances of payments which, as we will argue, are precisely measured by the Target balances”

Precisely measured, apart that is, from when they’re not at all precisely measured.

From the great professor’s NBER paper

“Ireland was affected by a massive capital flight, reflected in the fact that its cumulative current account deficit over the three years was only 14 billion euros, while its Target liabilities over the same period rose by 145 billion euros (to 142 billion euros).”

If Professor Sinn now wants to claim that his point is that Balance of Payments problems are precisely measured by Target 2 balances, then he is precisely wrong and contradicted by facts in his own paper. And in any case, we already have actual BoP statistics to measure this stuff.

This strikes me as “my actual point, and I do have one” kind of argumentation.

@ Karl Whelan
“If Professor Sinn now wants to claim that his point is that Balance of Payments problems are precisely measured by Target 2 balances, then he is precisely wrong and contradicted by facts in his own paper. And in any case, we already have actual BoP statistics to measure this stuff.”

Go ahead. Write a Vox article and show the world and the scientific community that
TARGET2 balances are a very bad measure of the balance of payments crisis in the
eurozone. Sinn’s argument will collapse if you can show that convincingly.


How can an argument be demolished when it’s just rubble? Karl Whelan has already written a Vox article about this nonsense. If he writes another somebody is going to do a Dryden on him:

“Soothed with the sound, the king grew vain:
Fought all his battles o’er again;
And thrice he routed all his foes, and thrice he slew the slain.”

@DOCM: “what is all the fuss about?”

AFAICT the Sinn faction wants a system akin to what Sinn imagines the Fed system to be. That is to say, the NCBs must settle TARGET claims with some safe asset, with safety defined to mean something like: retains its value even if the EZ breaks up. Is such an arrangement possible in a monetary union? As I understand it, Sinn says yes and Karl Whelan says no. But I may be oversimplifying.

Herr Sinn is astonishingly one-eyed when it comes to payment systems. For him, only Target2 exists. EURO1 and CLS don’t exist, despite the fact they carry a significant volume of transactions. Let’s put together a hypothetical example.

Bank A in London uses CLS to convert sterling to euros. It then uses SWIFT to transfer those euros to Bank B (as deposits) in Ireland. A number of transactions take place over a number of years. Bank A then grows a wee bit scared as a result of the collapse in Ireland and transfers those deposits, still in euros, to German via Target2.

Result? A negative Target2 balance for Ireland and a positive one for Germany.

Unless you take account of all the capital flows, you are entirely missing the point. It is like saying that the heart empties the body of blood because you only count the flow along arteries and ignore the veins.

@ Karl Whelan, Kevin Donoghue, HoganMayhew

Having finally managed to get through the Sinn paper, I am more convinced than ever that the problem for all concerned participating in the debate at a technical level is the unwillingness to face the fact that what is at issue is a political, not an economic or financial one.

The mistaken comparisons that Sinn draws with the US provide the key. The US was for many years a sovereign nation state (having fought a bloody civil war to prove it) without a central bank. The ECB – or, more accurately, the European System of Central Banks – is a central bank without a sovereign nation state. As the latter is not about to spring out of the woodwork, the conundrum to be resolved is the reverse side of that faced by US commercial banks before the Federal reserve was brought into existence (in a very curious form, it must be said, and which still raises questions on the relationship between Washington and Wall Street).

In fact, the “muddling through” by the EA17, as perceived by most commentators, is the only available solution.

Sinn just does not get it! Nobody could imagine a threat by Washington to exclude California, by way of example, from the US payments clearing system. A dollar is a dollar wherever it is located. The problem is that the euro is no longer a euro wherever it is located and the flight of capital denominated in euros to supposed safe havens is incontrovertible evidence of this.

Once this problem of overall confidence in the system is resolved, the supposed problem reflected in the debate about Target 2 will also resolve itself.



It must be said, in retrospect, that the creation of the euro was a very foolhardy undertaking. In his most recent Voxeu comment, Winkler leaves little doubt about this fact.

I might be wrong Karl, but you seem to be saying that because the change in Ireland’s TARGET2 balance does not equal its cumulative current account deficit, over the same period, Sinn must be doing something wrong. That is because Sinn essentially defines (Section 9 of his NBER paper) a country’s TARGET2 balance as its current account balance with the rest of the eurozone plus its capital account balance with the rest of the eurozone. In the sentence you quote, he is explaining that Ireland’s TARGET2 balance grew more because of capital flight than because of a current account / trade deficit.

No doubt thanks to his critics like Karl, Sinn’s NBER paper is much clearer than his earlier, less rigorous explanations. Like jmb, I urge Karl to write his own comprehensive and rigorous paper – actually a reply in NBER might be better because VoxEU is a little lightweight for such controversial subjects. As Clint Eastwood said, “go ahead, make my day”!

Happy New Year to all, even Sinn-deniers!


You raise an excellent point about the possibility that other settlement systems by-pass TARGET2, since Sinn’s balance of payments argument relies on all (non-self-cancelling) eurozone cross-border payments going through TARGET2. But I believe that most of these private sector settlement systems net out the flows from their members, and submit the net payments to TARGET2. As the ECB paper you link to says (p.179) “TARGET2 has to be used for all payments involving the Eurosystem, as well as for the settlement operations of all large-value net settlement systems handling the euro.”

@ Rebel

By and large, I’ve said what I have to say on this topic in my shorter articles, which I don’t think are lacking in rigour. But I’ll think about writing something longer if I get the time.

But I’m certainly not going to waste more time on this thread.

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