The real threat of the European Stability Mechanism; the Target 2 System
The last weeks of 2019 were, on a political level, characterised by a heated debate around the reform of the ESM, the European Stability Mechanism. The ESM problem is also intertwined with the complexities of the no less thorny Target 2; the European Central Bank’s payment system which has the task of ensuring that liquidity flows smoothly from one state to another.
Since 2008, some countries have accumulated a debit balance whilst others, a credit balance. This results in the imbalances which characterise the Eurozone. In our opinion, the Target 2 system represents a concrete threat to the stability of the single currency and the consequences of a “balance of accounts” would be catastrophic, especially for private assets.
In order to understand the risks, opportunities and how to secure your assets, fill out the form below to receive the complete report on the European Stability Mechanism and the Target 2 system.
As the national currencies are no longer present in the 19 member states of the Eurozone, the single exchange rate of the Euro is no longer able to act as a clearing house between the balances of payments of the various economies. Therefore, in cases where the exchanges of goods or financial securities for a partner state originated a deficit between exports and imports, the country concerned would find itself with a continuous “physical” weight of unsustainable monetary liquidity deficit.
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These debts are only theoretical as they do not have any due dates and do not require payment of interest. However, when asked on the matter, the then governor of the ECB, Mario Draghi, replied to two Italian MEPs that in the event of leaving the Euro, the central bank of the debtor state should immediately settle its position. The affirmation has thrown petrol on the fire of the debate around the “Italexit” risk, as Italy has recently noted a debt balance with Target 2 close to €500 billion, when before the crisis of 2008-09, had a surplus of €50 billion.
On the other hand, Germany has credits for over €900 billion, prompting some German economists close to Chancellor Angela Merkel to come up with a plan B; for Germany to exit from the Euro and cash in the credits, which are in fact equal to about half of the domestic public debt.
It is clear that no one would ever be able to repay a mountain of debt so high, even if they were due. For many, this is a deterrent against the calls of those who propose the return of national currencies, for others, an insight into an area of a financial system which is not standing up as it is.
What is certain is that the threat is real and in the event that these events should occur, the consequences would be catastrophic, in particular for private property.
In order to understand the risks, opportunities and how to secure your assets, fill out the form to receive the complete report on the European Stability Mechanism and the Target 2 system.