ALTERNATIVE BOP THEORIES

Alternative Bop Theories

Alternative Bop Theories

Introduction

The European Monetary Union is currently experiencing a serious internal balance of payments crisis that is similar, in many important ways, to the crisis of the Bretton Woods System in the years prior to its demise. In response to the crisis, the eurozone countries have mobilized enormous public rescue funds as of May 2010. However, funding really started some 21/2 years prior to that point, in the autumn of 2007, when some eurozone countries began to draw Target loans out of the ECB system which happened to come largely from the German Bundesbank, recently also from the Dutch central bank, and amounted to sums that dwarf these countries' participation in the official rescue packages. The IFO Institute has published several papers on this topic in recent months and has effectively created the first comprehensive eurozone Target database (Strauss 2008, 36-38).

Today it is the economic interpretation of events, rather than the facts, which is controversial. For this reason we have compiled various opinions in a special issue of the CESifo Forum. The authors range from current representatives of the Bundesbank and the ECB, who wish to convey a sense of normality, to Helmut Schlesinger, ex-Bundesbank President and Georg Milbradt, the former Minister President and Finance Minister of Saxony, who express their deep concern regarding the Target balances. Schlesinger explicitly criticises the reassuring statements issued by his former institution. The economists from universities and banks who submitted comments basically share Schlesinger's view emphasizing, among other things, the parallels to other balance of payments crises (Hanes 2002, 25-29).

Borrowing the money printing press

The accumulated balance of payments deficit or surplus of a euro country is measured by its Target liability or claim, as shown on the balance sheet of its central bank. In a currency union money usually criss-crosses country boundaries in either direction, with inflows and outflows balancing out. A balance of payments imbalance arises for a country if there is a net flow of money across its borders paying for an adverse net flow of goods and/or assets. To the extent that the net flow of money occurs electronically through the banking system it is recorded in the Target accounts. We speak of a Target deficit and surplus, respectively, to denote the net flow of money crossing a border, and of a Target debt and liability to denote the respective accumulated stocks, which are recorded in the balance sheets of national central banks (McCracken 2008, 55-58).

The reason why the Target balances are recorded in the balance sheets of national central banks can perhaps best be understood by seeing the net flows of money as resulting from the attempt of a deficit country to refinance its payment deficit by borrowing a printing press from other central banks. Until the summer of 2011, sizeable balance of payments disequilibria in the euro area basically only concerned these countries (EEAG 2011, 41-48). Even Italy's balance of payment was in equilibrium. In August 2011, however, things started to change dramatically, ...