The Economic and Monetary Union (EMU) cannot work at a full speed as it is still fragmented across countries. This is mainly mirrored by diverging performances in terms of competitiveness between surplus and deficit countries and culminated in a balance of payments (BoP) crisis with ‘sudden stops’ in private capital inflows. So far the ECB’s liquidity injections, necessary to avoid a disruptive BoP adjustments, have not been able to solve the credit crunch suffered by various deficit-countries, thus hampering the very transmission belt of monetary policy. These imbalances are clearly reflected in an asymmetric distribution of liquidity recorded by TARGET2 (T2), which itself tends to further amplify intra-EMU divergence.
This paper proposes to create a subsystem of T2, called TARGET3 (T3), managed as a multilateral clearing system and devoted to commerce and direct investments. It aims at creating incentives for banks to channel the liquidity created by the ECB towards the real economy and to achieve a medium-term equilibrium in the external balance of each country.