Attached is another good reference paper on the Eurozone's Target2 imbalances (hat tip Kostas Kalevras, @kkalev). A few comments on the topic:
1. The paper correctly points out the issue of liquidity imbalances (discussed here). This creates a divergence of money stock growth between the core and the periphery and severely impedes ECB's efforts.
2. Awash with liquidity Germany is more likely to decouple from the rest of the Eurozone, while the periphery would be hit by both tight money supply (tight credit conditions) as well as the various austerity related cuts. This will create a tremendous wealth disparity (and related social consequences) within the Eurozone.
3. It is important to clarify that Bundesbank's €500bn of claims is not against other central banks (NCBs), but against the Euro-system - effectively the ECB. If for example Greece were to exit the Union, the losses from the €100bn claim against the Greek Central Bank would be shared by the whole of Eurozone. Germany's cut is some 28% of that.
4. However it is possible that some other Eurozone members may not be able to (or decide not to) cover their portion of the losses, making Germany's exposure materially greater than 28%. This is not just a hypothetical scenario because the probability of Greece exiting the Union continues to be quite high in spite of the PSI debt reduction deal.
Target2- Monetary Policy Implications
A great overview of TARGET2 issues is also available here.