TARGET imbalances at record levels: Should we worry?

TARGET is the payments system for making settlements between euro area economies and five other EU economies. Cross-border transactions generate claims/surpluses and liabilities/deficits among national central banks which “net out” for the system as a whole. These imbalances are manageable in relative terms, but look large in absolute terms. None are larger than one third of their corresponding public debt ratios; and despite a big build up in the 2010-13 period, the imbalances now appear to be on a non-expanding cyclical path. The implications for the EU economies and their policymakers are less easy. The main drivers, beyond the need to fund persistent current account deficits or surpluses, are the use of different funding sources (some outside the euro area), internal and external portfolio re-balancing, loose monetary policy and exchange rate risks. TARGET imbalances support quantitative easing, but are not driven by it. The main threats are the divergence that interrupts further economic integration; and the increasing liabilities taken on by the ECB since 2015. That said, self-correcting mechanisms are weak which makes symmetric adjustments by both creditor and debtor countries essential (because of the adding up constraint); and the difficulty that the imbalances cannot always be eliminated simply by balancing current accounts around the system.