The European Central Bank (ECB) sits at the centre of a clearing system (‘TARGET2’) for national central banks (NCBs) within the eurozone. The pattern that has built up, particularly since the crisis, is that the NCBs of the ‘peripherals’, Greece, Ireland and Portugal, now joined by Spain and Italy, are in debt to Germany, The Netherlands, Finland and others.

The ECB places no constraints upon any single NCB debt; to do so would break the clearing system. There is no bank manager to call time on an overdrawn account.

There are additional considerations. By June 2011, some €850bn euro currency notes had been issued by eurozone NCBs. Again, there is no authoritative control. Just like King Canute, the ECB is impotent against a rising tide of euro banknotes.

Full eurosystem claims combine clearing balances and the net flow of euro banknotes between NCBs. In June 2011, those aggregated totals saw Germany (€174bn) and France (€56bn) as the biggest providers, with Ireland (€144bn), Greece (€112bn) Spain (€25bn) and Portugal (€38bn) the largest debtors.

As a proportion of GDP, the value of banknotes issued in the eurozone (9.0%) exceeds that of the USA (6.7%) and the UK (3.7%); and the high proportion of high values – 57% are €100, €200 and €500 notes – suggests uses beyond that of an ordinary medium of exchange. Also surprising is that Luxembourg’s banknote issue (98% in high denominations) was 8% of the eurozone total.

This information is not readily available. The data can be accessed only by delving into individual NCB accounts. One obvious unanswered question: why are these net borrowing positions not published centrally?

The integration of eurosystem claims (clearing balances, and euro banknote flows/issues) has been painstakingly documented by Lancaster University economist John Whittaker, whose findings in respect of TARGET2 were summarised in an earlier IEA blog post. The analysis then showed how TARGET2 credit had increased six-fold since 2004. The general conclusion then drawn was that the eurosystem is driven by the needs of the weakest NCBs.

Only with Whittaker’s assembly of information relating to TARGET2, net euro banknote liabilities and earlier extensions of loan facilities, does a full picture now emerge. For example, the external debt of the Greek government soared between January 2010 and September 2011; from €48bn to €180bn (see Whittaker’s chart 2).

The integration of data for intra-eurozone NCB banking flows with that relating to loan tranches to member states is also revealing. For example, in each of five months that Greece received new loan tranches, the eurosystem debt of the Bank of Greece fell; while in other months, that debt generally increased. Clearly, a close association exists between a member state and its NCB. Bailout funds for Greece displace eurosystem (ECB) lending to Greece for a while; but the total debt keeps rising.

The tight financial integration of the eurozone, together with the essentially political decision to cement all domestic claims into a foreign currency (the euro) was deliberate: thereafter no sovereign could expect to regain independence. A razor-wire fence was erected to prevent members from leaving the enclosure. Now that some inmates are proving excessively troublesome, that same razor wire is a formidable barrier to getting them out.

Further reading:

Steele, G.R. (2011) ‘Is Ireland exploiting eurosystem loopholes at Germany’s expense?

Whittaker, J (2011a) ‘Intra-eurosystem debts

Whittaker, J (2011b) ‘Eurosystem debts, Greece, and the role of banknotes

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