Dr. Steffen Murau| steffenmurau.com

‘European Monetary Unification through Novation. The Political Economy of the TARGET and TARGET2 Systems’ (with Matteo Giordano)

When Economic and Monetary Union became effective in January 1999, it remained unclear what accounting treatment to choose for claims and obligations that the Eurosystem’s National Central Banks (NCBs) incur against each other in the ‘Trans-European Automated Real-Time Gross Express Transfer’ (TARGET) system. In summer1999, the Governing Council of the European Central Bank (ECB) decided that they should be shifted against the ECB as an intermediating balance sheet—a process that is called novation. This decision has decisively shaped the countenance of the monetary union and its fate throughout the subsequent two decades but so far escaped the scrutiny of scholarship in International Political Economy (IPE).

This article adopts the perspective of critical macro-finance, which approaches the monetary system as a hierarchical web of interlocking balance sheets, to study the political-economic role of the TARGET system and its successor, the TARGET2 system. First, we theorize on monetary unification and depict different ways how separate monetary systems can be ‘stitched together’ at the apex. We show that novation of claims and obligations against a third-party balance sheet is not the only possible solution, but likely was the only one politically feasible. Second, we show how novation solves some inherent problems that have previously haunted the European Monetary System and provide a detailed comparison of the institutional solutions chosen for the TARGET and TARGET2 systems, taking into account the process of conceptualizing and implementing them. Finally, we use historical TARGET and TARGET2 data to explain how the novation method at the top of the hierarchy has repeatedly served to defend the integrity of the monetary union, both monetarily and politically. It has also enabled the evolution of the ECB balance sheet as an idiosyncratic tool that the Eurosystem could use to tackle multiple problems, in particular setting up swap lines and introducing unconventional monetary policy.

Matteo Giordano, School of Oriental and African Studies (SOAS)

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