Lack of collateral will stop euro flows

Blog post

Lack of collateral will stop euro flows

Publishing date: 08 June 2011
Authors: Guntram B. Wolff

Sir, Martin Wolf (“Intolerable choices for the eurozone”, Comment, June 1) and Hans-Werner Sinn have demonstrated how the eurosystem has made up for the flight of capital from peripheral eurozone economies and thereby allowed for continued current account deficits. This led to the build-up of large net claim positions in the internal bookkeeping system of the eurosystem “target-2”.

Let me make two remarks. First, the net claims of €325.5bn of the Bundesbank are not a risk for the German central bank itself. Any loss from monetary operations in the case of a default of banks and the given collateral would be distributed among the euro area central banks according to the European Central Bank capital keys. The loss to the German taxpayer would thus amount to “only” 28 per cent of the total loss. Second, the current flows do not reduce the liquidity available to banks in Germany. On the contrary, German banks are recipients of large capital inflows from the peripheral eurozone economies which they deposit with the Bundesbank. National central banks of the periphery in turn substitute the capital outflow.
Ultimately, the flows via the eurosystem will have to stop because of the lack of collateral available in the periphery.

Published on 8th June 2011 on Financial Times, comments section.

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.