How the TARGET2 Balances of the European Central Bank Worked BEFORE the European Financial and Debt Crisis

With the national central banks being part of the Eurosystem, the intra-euro area rescue measures became reflected in the TARGET2 balances of the European Central Bank. TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) is a real-time gross settlement system for payments within the euro zone, which is used to clear cross-border transfers in the euro area. Before the European financial and debt crisis, the national central banks’ positions in the TARGET2 system were widely balanced, because private capital flows were matched by respective payment flows resulting from goods markets transactions. For instance, German (Greek) capital exports (capital imports) corresponded to payments receipts (payments) for German goods sales (Greek goods purchases).

—Gunther Schnabl, “The Failure of ECB Monetary Policy from a Mises-Hayek Perspective,” in Banking and Monetary Policy from the Perspective of Austrian Economics, ed. Annette Godart-van der Kroon and Patrik Vonlanthen (Cham, CH: Springer International Publishing, 2018), 140.