CESIfo Embarrasses Itself Again

CESIfo Group, the research Institute of which Hans-Werner Sinn is president, has developed a fondness for issuing anonymous press releases that claim to “explain” Target2 balances to the general public. Today, their new press release claims:

Target credit levels in the Eurosystem are rising ever more steeply … Who are the losers from this process? The savers in those remaining European countries that still have sound economies. Without their knowledge or consent, the marketable securities owned by their savings banks, commercial banks and life insurance companies that usually cover their savings have been transformed into mere claims against their central banks, which in turn have acquired claims against the ECB system and indirectly against the central banks of Spain and Italy.

Let’s leave aside for a minute the fact that those coloured pieces of paper in your wallet are “mere claims against central banks”.  The idea that the assets of savings banks, commercial banks and life insurance companies have been altered by changes in Target2 balances is utterly false.

Target2 balances can only be accumulated (whether as a credit or a debit) by Eurosystem central banks. Take a look at any annual report of a German savings bank, commercial bank or life insurance company. You will not find that their marketable securities have been replaced by Target2 credits because this never happened and can never happen.

The anonymous person who wrote this press release has no clue what Target2 is or how it works. Its appearance should be a cause of great embarrassment to the CESIfo group and they should issue an apology and a retraction.

Anyone who has had the misfortune to read this press release and is now confused about what Target2 balances are should consult this short guide to the subject written by two Bundesbank economists and published (but then ignored) by CESIfo. Two other articles by me rebutting various CESIfo-inspired arguments can be found here and here.