Last week, Martin Wolf drew international attention to the work of Professor Sinn of the German IFO Institute, who has made a series of alarming claims about the build-up of Target2 imbalances within the European System of Central Banks. Professor Sinn focused on the fact that the Bundesbank is now in credit to other European central banks to the tune of €325bn, with the offsetting debits being held by the central banks of troubled peripheral economies (which Professor Sinn calls the GIPS, an acronym which I prefer to the PIGS).
Sinn also claimed that the provision of German credit to the GIPS had effectively sucked lending capability out of the German banks, thus holding back the German economic recovery. This has triggered an intense debate about whether Germany is at risk from the potential failure of these debts, and whether the ECB has engaged in a “stealth bailout” of the GIPS. (For latecomers to the debate, see Paul Krugman, Tracy Alloway, Olaf Storbeck and Geoffrey Smith.)