Is the eurozone not a monetary union, but an extraordinary exchange rate union?

The Target imbalances within the Eurozone can be interpreted as a sign of a missing balance of payments adjustment mechanism for the member countries or at least a sign of a mechanism which is not working properly. As the Eurozone lacks a fiscal and political union and national central banks still exist within the European System of Central Banks, in economic theory the arrangement seems to be more like an exchange rate union or a system of fixed exchange rates rather than a monetary union. In the latter, there would not be any national balances of payments, but only one for the whole Eurozone. In this paper we will show why the large Target imbalances are one crucial indicator for the Eurozone not being a monetary union, but an extraordinary exchange rate union or a kind of fixed exchange rate system, and why countries holding Target liabilities against the European System of Central Banks can be compared to a reserve currency country, e.g. like the USA during the Bretton-Woods-System with the difference that in the latter the strongest country held this status whereas now it is the weakest countries. Therefore, we adapt – under certain assumptions – the model of an exchange rate union to the construction of the Eurozone and create virtual real foreign exchange markets for the country groups GLNF (Germany, Luxembourg, the Netherlands, Finland) and GIIPS (Greece, Italy, Ireland, Portugal, Spain) to discuss the parallels of the Target System mechanism and its effects to those of foreign exchange markets in a fixed exchange rate system. Furthermore, we come up with some alternatives of internal balancing for reducing the Target imbalances and explain these again with help of the virtual real foreign exchange markets. As main result we are able to prove the possibility of modeling the Eurozone as an extraordinary exchange rate union (as countries share a common currency) with the Target System as adjustment for imbalances in the real economies of the member countries.