Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/55848 
Year of Publication: 
2012
Series/Report no.: 
Working Paper No. 105
Publisher: 
Universität Leipzig, Wirtschaftswissenschaftliche Fakultät, Leipzig
Abstract: 
The paper scrutinizes the reasons for the European debt crisis, the implications for TARGET2 imbalances and options for surplus liquidity absorption within an asymmetric EMU. It is argued that starting from the turn of the millennium diverging fiscal policy paths and diverging unit labour costs were the driving force of rising intra-European current account imbalances within the euro area, which were enhanced by post-2001 low interest rate policies and changing financing conditions for the German banking sector. The paper shows how since the outbreak of the crisis the adjustment of intra-EMU current account imbalances is postponed by a rising divergence of TARGET2 balances, as the repatriation of private international credit and deposit flight from the crisis economies is substituted by central bank credit. Given that this process has brought Deutsche Bundesbank into a debtor position to the domestic financial system, we discuss options for liquidity absorption by Deutsche Bundesbank to forestall asset price bubbles in Germany.
Subjects: 
EMU
fiscal divergence
TARGET2
current account imbalances
Document Type: 
Working Paper

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