Capital Flight to Germany in Full Swing

Capital; flight to Germany, the Netherlands, and Finland is in full swing. These sums cannot be paid back.

I have commented on Target2 liabilities before.

Perhaps a Mish-modified translation from the Welt article Imbalance in the Euro System Reaches a New Record will ring a bell.

The central banks of Germany's euro partners Italy, Spain and France owe the Bundesbank almost a trillion euros . This is a new high. - more than ever before. Tendency continues to rise. There is no security for this money.

Read that last line again and again until it sinks in. Italy is €464.7 billion in the hole. Spain is €376.6 billion in the hole.

Debtors owe Germany, the Netherlands, and Finland over €1.157 trillion.

In May, Italian liabilities increased by almost 40 billion euros.

"Capital flight to Germany is in full swing," says Hans-Werner Sinn, longtime head of the Ifo Institute and one of the most prominent economists in the Federal Republic.

Originally, Target2 was designed to facilitate cross-border transactions within the eurozone. The system achieved this goal. From the point of view of critics, this means that the Deutsche Bundesbank provides long-term unsecured and non-interest-bearing loans to the central banks of other eurozone countries , especially the central banks of southern countries Italy, Spain and Portugal.

Fundamental Eurozone Flaw

Target2 is a fundamental problem of the Eurozone.

  • The ECB guarantees these loans.
  • As long as they are guaranteed, then hells bells, why not make more loans?

Germany Will Pay

Germany will pay one way or another. Here are the possibilities.

  1. Germany and the creditor nations forgive enough debt for Europe to grow. This is the transfer union solution.
  2. Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe
  3. Breakup of the eurozone

Those are the alternatives.

Germany will not allow number 1. It is unreasonable to expect number 2 to last forever. The only door left open is door number 3.

The best move would be for Germany to leave the eurozone. Germany is in the best shape to suffer the consequences.

Unfortunately, the most likely outcome is a destructive breakup of the eurozone, starting in Italy or Greece.

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Mike "Mish" Shedlock

Comments (19)
No. 1-19

Mish, Italy WILL NOT voluntarily leave the Euro. Crunch time is coming and something has to give but Italy will not leave voluntarily. Solution is unknown but perhaps not on your list above.


If Germany leaves the eurozone, the Euro will go bye bye. And hence all debt denominated in Euros will be denounced. Germany's only hope is to stay in the eurozone and hope austerity takes hold in the Mediterranean countries and Germany gradually gets paid back. Not saying it's likely to happen.


"Creditors owe Germany, the Netherlands, and Finland over €1.157 trillion." Creditors? Debtors, surely????


If one looks at the economic damage in the periphery and the growth of anti-establishment movements throughout the EU, the break-up of the EU is well underway. However, since the formal break-up will bring an end to unelected bureaucratic jobs in Brussels, don't expect the break-up to be civil. BTW, during the break-up process, where do you think capital will run?

Is this money created out of thin air by Germany like QE or is it crowding out other lending? If it is created out of thin air, it can disappear out of thin air. Europe wants to be like Japan.