Target2 imbalances and poverty in the eurozone

Area of Science:

• Economics
• International Finance
• European Economic Studies

Background:

• External imbalances within the Eurozone are monitored via the Target2 (T2) settlement mechanism.
• These imbalances can affect official reserves and signal balance of payments disequilibrium.
• Existing T2 discrepancies have contributed to interest rate differentials and disparities in living standards across Eurozone countries.

Purpose of the Study:

• To investigate the empirical relationship between external imbalances (T2 discrepancies) and poverty levels in the Eurozone.
• To assess the implications of T2 imbalances for economic stability and living conditions within member states.

Main Methods:

• Empirical analysis conducted across 11 Eurozone countries.
• Statistical correlation analysis between Target2 (T2) discrepancies and poverty indicators.
• Robustness checks performed using various control variables.

Main Results:

• A significant negative correlation was found between Target2 (T2) discrepancies and poverty.
• Results suggest that T2 imbalances are linked to increased disparities in living conditions.
• The findings align with interpretations derived from balance of payment crisis models.

Conclusions:

• The current Eurozone policy framework, lacking compensatory mechanisms, may need revision.
• Recommendations include the adoption of centralized fiscal instruments to address imbalances.
• Anti-speculative monetary interventions are suggested to mitigate negative impacts of T2 discrepancies.