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Some commentators have suggested there is a limit to how large the Bundesbank's TARGET2 claim on its balance sheet can grow, implying a corresponding limit to how much the Eurosystem can lend to banks in the current account deficit countries. The Bundesbank is a long way from reaching this limit. The theoretical limit is imposed by two factors out of the Bundesbank's control: the amount of collateral banks in southern Europe can muster to borrow more money from the ECB and the amount of capital flight from them. The pool of eligible collateral in the euro area is enormous. The ECB estimated it at 14 trillion at the end of 2010, and recently introduced rules to allow banks to use even more collateral, albeit of lower quality, to borrow from it. So the collateral for further borrowing exists should capital flight persist. We see the risk of capital flight continuing. While the ECB's generous liquidity operations and bond purchases have calmed financial markets down, the eurozone's long-term structural problems remain. Debt overhangs persist, growth is mediocre and the governance structure - a common monetary policy without a centralized fiscal policy - is a challenge. History is fraught with monetary unions that broke up because they did not progress to political and fiscal union. What should convince us that this time is different?
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