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