Target2 Imbalances and the ECB’s Asset Purchase Programme: An Alternative Account

Abstract

The aim of this paper is to investigate the cause behind rising Target2 imbalances since early 2015, coinciding with the implementation of a quantitative easing program by the ECB. Two facts have captured our attention. Firstly, the official explanation of rising Target2 imbalances, offered by the ECB, is not convincing because it does not fit the empirical evidence available for Italy and Spain. Further, our alternative interpretation reveals that through quantitative easing, the ECB has helped to clean up banks’ balance sheets and has indirectly funded government spending. Secondly, those who spoke out against the risks of rising Target2 imbalances in 2011-2012, now remain silent on this issue, despite the fact that some of the presumed risks during the first wave of rising imbalances still hold. We interpret this silence as an implicit acceptance that the risks put forward in 2011-2012 are offset by reform fatigue and anti-euro sentiments in the Euro Zone.