Target2 – the Trans-European Automated Real-time Gross Settlement Express Transfer system – started off as a simple payment system for cross-border transactions in the Eurozone.
Its use is mandatory for the settlement of any euro transaction involving the ECB and the national central banks of the Eurozone member states.
It has, however, become something much more – the silent bailout system that keeps the euro afloat. Europes political elite know this – they just dont want the rest of us finding out.
A key underlying problem is that the Eurozone does not satisfy the economic conditions for being an Optimal Currency Area, a geographical area over which a single currency and monetary policy can operate on a sustainable long-term basis.
The different business cycles in the Eurozone, combined with poor labour and capital market flexibility, mean that systematic trade surpluses and deficits will build up – because inter-regional exchange rates can no longer be changed.
Surplus regions need to recycle the surpluses back to deficit regions via transfers to keep the Eurozone economies in balance. The largest surplus country – Germany – refuses to formally accept that the Eurozone is a “transfer union”, but, deficit countries including Italy – the largest – are using Target2 precisely for this purpose.
In short, Target2 has become a giant credit card for Eurozone members that import more than they export to other members. But note two key differences compared with a normal credit card: the interest rate charged is zero, and the loan never needs to be repaid.
Italy and Spain owe €433bn and €374bn respectively, which they can never pay, and Germany is owed €871bn, which it will never recover.
Target2 is also being used to facilitate capital flight, because residents in Italy, Spain, Portugal and Greece have lost confidence in their banking systems.
Those with bank deposits above €100,000 are liable for an eight per cent haircut if their bank becomes insolvent. The result is that the Eurozone economies – particularly those of the southern member states – are stuck in a Japanese-style deflation trap permanently.
Target2 is clearly not a viable long-term solution to systemic Eurozone trade imbalances and weakening national banking systems.
There are only two realistic outcomes. The first is full fiscal and political union – which has long been the objective of the Brussels political establishment, but is clearly not supported by the majority of Europes peoples. The second is that the Eurozone breaks up.
Forget about the differences between a “customs partnership” and a “customs agreement”, the real question that needs to be asked of those whose real purpose is for the UK to stay in the EU – and they are the very same people who wanted us to join the euro in the first place – is about Target2.
These advocates need to justify why we should associate ourselves with a group of people who are so misguided that they thought the euro project could ever work.
Of course, the real aim of the euro-fanatics ever since the days Jean Monnet (“I have always believed that Europe would be built through crises”) has been to create a European empire by stealth. Monnet, one of the EUs founders, thought that economic crises should be welcomed as opportunities to bring the states of Europe closer together, give up sovereignty, and gradually move to a federal Europe.
He wrote in 1952: “Europes nations should be guided towards the super-state without their people understanding what is happening. This can be accomplished by successive steps, each disguised as having an economic purpose, but which will eventually and irreversibly lead to federation.”
Anyone who thinks that the UK can be in the customs union – or indeed any kind of “customs partnership” – yet avoid being drawn every closer into a European super-state controlled by unelected mandarins in Brussels who are supported by unelected judges at the European Court of Justice is either being very naive or completely disingenuous.
Ask them about Target2, and also ask how you can get hold of your own Target2 credit card. And tell all your friends to ask them too.
Read more: The EUs federalist fantasy is under threat