Forging Monetary Unification through Novation: The TARGET System and the Politics of Central Banking in Europe

Murau, Steffen; Giordano, Matteo

Abstract

When the European Monetary Union became effective in January 1999, the accounting treatment for claims and obligations which the Eurosystem’s National Central Banks (NCBs) incur against each other in the ‘Trans-European Automated Real-Time Gross Express Transfer’ (TARGET) system remained unspecified. Only later in 1999, the Governing Council of the European Central Bank (ECB) decided that these claims and obligations should be shifted to the ECB’s balance sheet as a central counterparty—a process called ‘novation’. This ex-post decision completed monetary unification by uniquely ‘stitching together’ NCBs’ balance sheets while profoundly transforming the role of the ECB’s balance sheet. First, novation centralised it at the Eurosystem’s apex, which had not been politically feasible ex ante. Secondly, novation repurposed it into a multilateral mechanism to provide automatic, unlimited funding for cross-border payment imbalances. Thirdly, novation allowed monetary technocrats to operationalise it as an autonomous ‘firefighting’ balance sheet for unconventional monetary policy.

Citation

Murau, S., & Giordano, M. (2024). Forging Monetary Unification through Novation: The TARGET System and the Politics of Central Banking in Europe. Socio-Economic Review, 22(3), 1283-1312. https://doi.org/10.1093/ser/mwad067

• Journal Article Type: Article
• Acceptance Date: Dec 13, 2023
• Online Publication Date: Dec 21, 2023
• Publication Date: Jul 1, 2024
• Deposit Date: Feb 10, 2024
• Publicly Available Date: Feb 10, 2024
• Journal: Socio-Economic Review
• Print ISSN: 1475-1461
• Electronic ISSN: 1475-147X
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 22
• Issue: 3
• Pages: 1283-1312
• DOI: https://doi.org/10.1093/ser/mwad067
• Keywords: critical macro-finance; monetary system; payment system; Eurocrisis; unconventional monetary policy; swap lines
• Publisher URL: https://academic.oup.com/ser/advance-article/doi/10.1093/ser/mwad067/7490876