Effects of the TARGET Imbalances on the Eurozone Periphery Economies

The Eurozone has experienced a surge in TARGET2 imbalances since the global banking crisis and the European sovereign debt crisis. The aim of this paper is to discuss whether the emergence of the TARGET2 imbalances has affected the Eurozone periphery economies positively or negatively. Greece failed to restructure its economy and its recovery was slow compared with that of non-Eurozone member Poland, even despite the ECB's so-called unlimited low-interest TARGET2 ‘stealth bailout' through the Bank of Greece. For this paper, a panel regression analysis of the effects of TARGET2 liquidity inflows was done using the annual data of the GIPSIC countries (Greece, Italy, Portugal, Spain, Ireland and Cyprus) from 2000 to 2020. The cross-border funding (to-GDP-ratio) via their central banks, including the TARGET2 borrowings, was found to have a significant negative relationship with GDP growth (per capita). Foreigners' portfolio investments and banks' borrowings abroad meanwhile had positive relationships with growth rates. Finally, fixed effects model regression with dummy variables found structural breaks in the GIPSIC economies after the sudden stops of crossborder funding. This could be one piece of evidences contradicting the claim that the emergence of the TARGET2 imbalances was only an accounting phenomenon. Following Sinn and Wollmershäuser (2011), it would seem to be worth considering a cap on the maximum amounts of the unsettled TATGET2 balances. To prevent the expected side effects further, consideration should also be given to introducing the regular clearance of TARGET2 claims and debts, similar to what is done in the ISA (Inter-district Settlement Account) of Fed-wire. The implications of this research should be useful for building the ASEAN+3 currency union now underway, and for developing a sustainable payment system in the case of the future promotion of gradual inter-Korean economic integration.