Most recently, the Bundesbank’s claims against the European Central Bank fell, now the balance from the Target 2 payment system has risen again. It remains above the trillion mark.

Headquarters of the ECB in Frankfurt: The German Target balance describes the Bundesbank's claims against the ECB from the European Target 2 payment system.

Dhe German Target balance rose by around 37 billion euros to 1.081 trillion euros in March. The Deutsche Bundesbank announced this on Wednesday. Behind this huge number are the demands of the Bundesbank from the European payment system Target 2 against the European Central Bank (ECB). This system is used, among other things, to process cross-border payment transactions between banks and central banks in the euro zone. At the end of each day, the different payment flows for each country are added to a balance. The balances therefore reveal something about the flow of money in Europe.

In the corona pandemic, the German balance has reached new heights after it had been a bit calmer in the meantime. It reached its highest level to date in December 2020 at 1.136 trillion euros. The balance fell slightly in the first two months of this year. But now it has risen again. An important reason why the balance tends to increase during the crisis is the bond purchases by the central banks of the Eurosystem. In these bond purchases, the buyers and sellers of bonds are often from different countries. If, for example, a Spanish government bond is bought by the Spanish central bank, but the seller is an international investor with an account in Frankfurt, this leads to a flow of money that affects the Target balance – in this example positive for Germany, negative for Spain.

For the slight decrease in the target balance in January and February, the Bundesbank blamed the key date effects as well as the usual seasonal fluctuations: “In the past two years, the target balance in January and February was lower than in December and March.”

The Osnabrück economist Frank Westermann emphasizes another phenomenon that is also influencing target balances in the pandemic: capital flight, in a broader sense. In the Corona crisis, investors wanted to part with risky securities in southern Europe and prefer to acquire safe assets in Germany, says Westermann. They do this by depositing the insecure paper with their national central banks in the Eurosystem as collateral and receiving loans that they can use to acquire secure assets in Germany, for example. These cross-border transactions would result in corresponding movements in the Target balances: the German balance would rise, the southern European balance would become more negative.

This phenomenon can be observed in the development of the volume of so-called refinancing loans. There was a noticeable increase in these loans from central banks to banks in the euro zone as of March 25, the second highest since ECB President Mario Draghi’s “Bazooka” in 2011. The volume of all refinancing loans in the euro zone was up by 312 billion 2105 billion euros increased. The parallel increase in the German Target balance suggests that part of this liquidity was transferred to Germany, said Westermann: “I think it is likely that capital flight plays a role.”