A look into German Exports and the Role of the Central Bank

Gunnar Beck writing for the Guardian breaks down why as German exporters seem to be enjoying a boom, Germany is not benefitting as wages and living standards are frozen as poverty continues to rise.

So why has Germany’s export boom not led to higher growth and living standards? Besides wage depression, the key explanation for this apparent paradox, Hans-Werner Sinn of the Ifo-Institute has shown, lies in the deceptively innocuously named European Central Bank’s inter-banking payments settlement system for cross-border trade, services and capital transfers within the eurozone, known as Target2. Every time money flows from the banks of one euro member country to the banks of another, it does so through the Target system (unless, of course, the money flows across the border as cash in a suitcase).

The basic mechanism of this system is simple enough: let’s assume a Spanish company orders 50 state-of-the-art diesel engines from a German manufacturer. Once the German exporter has delivered the engines, the Spanish importer will advise his bank to transfer the agreed purchase price. The Spanish bank will initiate the transfer through the Spanish central bank, which will credit, ie enter a liability on its accounts in favour of, the German Bundesbank, which in turn credits the sum to the bank of the German exporter. The Spanish importer gets his machines, the German exporter receives his money, but – and here’s the twist – the money never leaves Spain and it never enters Germany. Instead, the Bundesbank receives a Target2 claim against the Bank of Spain.

On 30 November 2012 the Target2 claims by the Bundesbank against other eurozone central banks stood at €715bn (£581bn).Through its Target2 credits, the Bundesbank is financing German export and current account surpluses within the eurozone because southern Europe has never had the money to import German goods on such a scale. The Bundesbank’s Target2 credits amount to about two thirds of its entire balance sheet. They are entirely unsecured.

via Guardian

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