In practice, monetary and financial policy have long been closely intertwined.
(Photo: Reuters)
The European Central Bank (ECB) only manages to report a zero result for 2022 by releasing a financial reserve of around 1.6 trillion euros. In other words: “operatively” she made a fat loss.
And that’s not counting the fact that it doesn’t mark interest-bearing securities at market prices — otherwise it would have to book an even bigger loss. For this reason, the ECB, and this should also apply to the national central banks in the euro area, will not be able to transfer profits to governments in the near future.
Now it is not one of the tasks of the ECB and the affiliated central banks to provide financial support to states. It’s also not part of their job to report profits, technically they don’t even need to have positive equity. Nevertheless: In practice, monetary and financial policy have long been closely intertwined.
Against this background, it is important to note that the absence of profit transfers now is only a reflection of the strong support governments previously received through government bond purchases. After all, the losses are ultimately caused by these holdings, whose interest rates are very low compared to today’s levels.
This support is also likely to have played a major role in the fact that debt in the euro area has recently fallen significantly. From the fourth quarter of 2021 to 2022, national debt has shrunk from 113 percent to 95 percent of gross domestic product within a year, according to figures from the major banking organization IIF. That was due to growth – and the otherwise unhelpful inflation. The ECB is jointly responsible for both, and both are closely related.
Reserves: not necessary, but still good
Much more important than central bank profits is therefore the question of how much higher interest rates will burden government budgets if the euro central banks gradually withdraw from the bond market, which is planned from March and is also necessary to keep inflation in check. In other words: the big bill for the support of the past few years is yet to come.
Two other points should not be overlooked in the ECB loss debate. Firstly, it is good if the central banks build up reserves for this eventuality, which the Bundesbank, for example, has also done. Because even if balance sheet losses would not technically make a difference, they are difficult to convey to the public.
Second: On the other hand, central banks form an effective buffer even in the event of a catastrophic collapse of the euro zone. Mutual claims, known under the keyword “Target 2 balances”, would initially only lead to a loss of profit transfers at most.
More: Loss of 1.6 billion euros – turnaround in interest rates eats up ECB profits