On second thought: this has nothing to do with Eurobonds. It is, in fact:

1. The Greek "Escrow Account" by another name: EU Deficit countries would issue bonds secured by priority claims on tax revenues
   
2. The reverse of Keynes' proposal at Bretton Woods: a proposal to pile interest penalties on current account deficits (Sinn does admit that the origin of the Target2 balances is persistent intra-EU current account imbalances) where Keynes proposed to charge interest on current account surpluses

Yee-haw!

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

On Target2, see Making sense of Target imbalances (on VoxEU, by Willem Buiter, Juergen Michels and Ebrahim Rahbari, 6 September 2011)

The fates of sovereign and the banking systems in many Eurozone member countries, and in the Eurozone as a whole, are strongly intertwined, as first the financial crisis and soon after the Eurozone sovereign debt crisis has shown. Despite - or due to - the abundance of problems within the Eurozone, it is important to be careful in presenting and interpreting the facts in an objective way. In that respect, it is important to highlight that TARGET2 imbalances:

• Cannot be automatically linked to current-account deficits in those countries;
  
• Do not automatically reduce central bank credit to commercial banks in other member states (and any reduction of central bank credit should not be interpreted negatively, as implying reduced funding for banks and their customers); and
  
• Should not be interpreted as a measure of the risk exposures of the national central banks of TARGET2 creditor countries.

This does not mean that the increase in TARGET2 imbalances cannot be suggestive of serious problems.

* These imbalances may be - and currently likely are - a symptom of the difficulty of banking systems in a number of Eurozone periphery countries have in funding themselves in the markets without public support.

They should therefore primarily be understood as a call to action for policymakers to put the banking systems in the Eurozone periphery and core on a sound footing - a goal that continues to elude them even after almost four years since the onset of the financial crisis.

In any case, if Sinn is right that the Target2 balances represent a funding of current account imbalances, then one possible way to fix the problem is for German actors to buy assets in the periphery directly (or to buy products from the periphery, or to go on vacation in the periphery), something they apparently don't want to do in sufficient amounts. Now, if the German economy is not interested in buying Spanish real estate, what would be gained by Spain selling to the Bundesbank covered bonds backed by state claims on Spanish real estate?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

Hans-Werner Sinn:

priority claims on future tax revenues

Luckily, Spain has that covered

This is probably the least ominous reason for the rush to approve this. In fact, most of the provisions of the new Constitutional amendment and impending Organic Law won't take effect immediately. The spending ceiling only becomes binding after 2020 (however, to bring a 9% deficit to 0.40% in 9 years does require reducing it by 1% per year in the middle of a recession, which will require biting austerity with immediate effect). There's only one provision of the proposed New Article 135 (in Spanish) which will have immediate effect:

Los créditos para satisfacer los intereses y el capital de la deuda pública de las Administraciones se entenderán siempre incluidos en el estado de gastos de sus presupuestos y su pago gozará de prioridad absoluta. Estos créditos no podrán ser objeto de enmienda o modificación, mientras se ajusten a las condiciones de la Ley de emisión.

Credits to service interest and principal on the public debt of the various Administrations will be understood to be part of the expense account of their budgets, and their payment will have absolute priority. These credits won't be subject to amendment or modification, as long as they keep to the conditions of the law by which they were issued.

The emphasised text is what's being added by the amendment.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

It's not Eurobonds because Sinn is not actually proposing that "the Eurosystem" issue covered bonds, but that each individual deficit country sell covered bonds to the Bundesbank.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

Also in today's Eurointelligence Daily Briefing:

Mark Schieritz

Writing in Herdentrieb, Mark Schieritz applauds Mario Draghi's Big Bertha as a masterpiece. He calls it one of the cleverest moves in central banking history.  Draghi managed to establish the ECB as a lender of last resort in a way that satisfies its legal and also the political constraints, especially in Germany. The ECB cannot allocate credits directly - which is the intrinsic job of a banking sector in a free market. The liquidity operations are so big, that the ECB has now replaced the Fed as the world's largest money printing machine. The eurosystem's balance sheet is now close to €2750bn, whereas the Fed's is about half a billion smaller. And there are no indications that the extra money will create inflation.

Of course the Bundesbank is upset.

But also,

Weidmann is particularly critical about the relaxation of the collateral rules, especially the rule that national central banks can now accept corporate credits as collateral. He demands a return to a standard collateral system.

is prima-facie evidence that Weidmann either has not read or has not understood the relevant passages of Minsky's Stabilizing an Unstable Economy. More ominously, it might be evidence that he does not care

Eurointelligence Daily Briefing: Weidmann ascends to the throne

New Bundesbank president Jens Weidman was official enthroned yesterday; indicates his main focus would be to watch over, and comment on, German government's fiscal policy; says price stability must take precedence over financial stability

Oh, dear. And this a day after we're told "Merkel's quid-pro-quo on Draghi" (being the next President of the ECB) is to put a German in charge of the European Financial Stability Board.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman