Notes on the Role of TARGET in a Stage III Crisis

When Stage III of EMU begins on January 1, 1999, member countries will irrevocably lock exchange rates, and interbank payments in euros will commence. Will the ensuing respite from Stage II instabilities be permanent or only the eye of the storm? Can Stage III itself be subject to an attack that forces a realignment of the of the system? The key question for this paper is how the infrastructural arrangements designed to underpin the monetary union will emerge to determine capital flow dynamics in a crisis and accentuate potential cross-border flows. The answer lies in the details of the TARGET payment system, which can provide the inter-central bank credit necessary to fund an attack.