ECB: The Great Monetary Destruction Has Begun

Recently, the ECB and the Federal National Bank of Germany, Deutsche Bundesbank, almost simultaneously announced huge losses for 2023 - because of high interest rates, they said. In reality, the ECB has created several trillion euros virtually out of thin air over the last ten years through its "crisis purchase programmes". Now, with the help of the key interest rate, they are being written off. This is to the detriment of the weakening economy. And it clearly shows that with the introduction of a digital euro, the risk is increasing that unhedged fiat money can be created and destroyed "at the touch of a button".


The European Central Bank recorded a loss in 2023 for the first time in around 20 years. This loss, amounting to 1.3 billion euros, is only manageable because the ECB has dissolved its provisions for financial risks and has already prepaid 6.6 billion euros in losses. For 2023, there will be no distribution of profits to the national central banks of the eurozone. What's more, the ECB is set to continue making losses in the years ahead.[1]

It's a crisis

The leaders say that the ECB is in a position to act effectively, whatever the losses incurred, and to fulfil its primary mandate of maintaining price stability. What's more, they are confident that "the eurozone economy is heading for a 'soft landing', which means that inflation can be kept under control without triggering a recession", as Isabel Schnabel, a member of the ECB's Governing Council, points out.[2]

However, the monetary earthquake that originated in Frankfurt am Main is continuing in the Member States. Last Friday, the Deutsche Bundesbank also had to announce a significant loss for 2023: the result is around 21.6 billion euros, the provision for risks amounting to 19.2 billion euros has been entirely dissolved to offset the losses, as have the reserves amounting to 2.4 billion euros. The monetary policy measures of recent years have significantly increased the financial risks on central banks' balance sheets, and these risks were realised in 2023, it is explained.

In concrete terms, this involves increased purchases in the APP and in the PEPP linked to the pandemic, which significantly increase the risk of variations in balance sheet interest rates. These risks have been realised with the increase in key rates since mid-2022 and will result in massive losses in 2023. Recall that the ECB's Asset Purchase Programme (APP) was launched in mid-2014 as part of a non-standard monetary policy package, which also included targeted longer-term refinancing operations, to support the monetary policy transmission mechanism and provide the degree of monetary policy accommodation needed to ensure price stability. Rather than complicated words, let's let the figures speak for themselves: the Eurosystem's outstanding APP bonds totalled 3189 billion euros at the end of January 2024.[3]

On top of this, since 2020, there has been the Emergency Pandemic Purchasing Programme (EPPP), whose initial volume of €750 billion was subsequently increased to €1.85 trillion. As a result of these two programmes alone, we are talking about more than €5 trillion in bonds outstanding as a result of the purchase programmes of recent years. A significant proportion of the public debt of the eurozone countries is on the books of the banks.

What debt?

In the eurozone, this has a direct impact on national banks. The Deutsche Bundesbank is therefore assuming that losses will be considerable in 2024 and that it will not be able to distribute profits for a long time to come. The Deutsche Bundesbank's last reported losses date back to 1979.[4]

The "great monetary destruction" has therefore begun - and the ECB will hold the rudder of the key rate for as long as possible. Christine Lagarde and her colleagues have been trying for some time to convince the markets that the fight against inflation has not yet been won - and that the ECB should therefore not cut rates too quickly.[5]  This has led to some harsh criticism, particularly from an economy that has already been badly shaken. But the custodians of the ECB's currency want to see more evidence that inflation is approaching its 2% target before they can start cutting interest rates.

So there is even more reason to fear that the ECB's monetary policy will deepen the economic crisis in the eurozone and turn it into a recession. But there is another factor to bear in mind:

Until the financial crisis of 2007/2008, the monetary base consisted largely of banknotes and, to a lesser extent, current account balances. Today, the opposite is true: national banks have significantly increased their holdings of giro accounts in order to maintain the fluidity of the financial system. The fewer liquidity reserves banks hold in credit money, the greater the risk that they will slide easily into illiquidity. This is what happens when there are more withdrawals of deposits than liquidity reserves.

That's why the ECB, with the active support of the Commission and the Member States, is working to phase out cash: €500 notes have been discredited because of money laundering and tax evasion, a European ceiling of €10,000 has been set and many suppliers - including airlines and supermarkets - now only accept cashless payments. It is supposed to be unattractive, complicated and even risky to possess cash.

At the same time, the ECB is working feverishly on the introduction of a digital euro: this should complement cash, not replace it, it is often claimed. Nevertheless, among many other fears, there remains a flaw that is difficult to eliminate from the point of view of monetary policy: the risk that the digital euro will be nothing more than unbacked fiduciary money - the only difference being that it will then be much easier to destroy at the touch of a button.