Introduction
The European Central Bank (ECB) issued its 2024 annual report on 20th February and revealed that it now has negative capital.1 What with the German elections delivering a stalemate, this development shines an unwelcome spotlight on the infrastructure of the euro. The amount itself is not a disaster but there is a bigger loss sitting in the background – the paper loss of around €800 billion on its Asset Purchase Programmes and the Pandemic Emergency Purchase Programme – and the ECB’s predicament will raise uncomfortable questions about how that loss would feed through the euro’s infrastructure if even a small portion of it were to be realised.
What has happened at the ECB
The ECB made a loss of €7.9 billion in 2024. It made a similar loss in 2023 but was able to apply a relevant provision of €6.7 billion to mitigate it. A ‘Loss for the Year’ of €1.2 billion appeared on the 2023 balance sheet, which reduced its effective capital from €8.9 billion to €7.7 billion.
This year it had no relevant provision which it could release to mitigate the loss. The 2024 ‘Loss for the Year’ of €7.9 billion plus the Accumulated Loss of €1.2 billion brought forward from 2023 total €9.1 billion, exceeding the ECB’s capital of €8.9 billion and leaving it with negative capital of €0.2 billion.
This does not mean it has gone into bankruptcy or is insolvent (meaning unable to meet its liabilities as they fall due). Its main creditors are its owners, the EU national central banks (the NCBs), and they are unlikely to ‘pull the plug’ on it.
What caused the loss
The ECB’s annual loss is tied up with how it remunerates the balances of the accounts held by the NCBs in the TARGET2 payment system. The ECB was borrowing about €350 billion on average from that system during 2024 and paying an interest rate of around 4%. In 2022 it was lending all that money out at approximately the same rate to commercial banks under a programme called Targeted Longer-Term Refinancing Operation Series 3.
But this programme ran off progressively during 2023 and 2024 and, although the ECB has reduced interest rates to its own advantage over that period, it has been left with an interest loss of around 2% on the €350billion in 2023 and 2024. That delivered an annual Net Interest Loss of €7 billion in both years. Sundry income and expenses items and running costs delivered the other €0.9billion of the €7.9billion loss in 2024.
What did not cause the loss
The ECB’s capital deficit of €0.2 billion pales into insignificance compared to the €800 billion paper loss on the Asset Purchase Programmes and the Pandemic Emergency Purchase Programme. This loss is unrealised and reflects the huge amounts that the ‘Eurosystem’ deals in, the Eurosystem being the ECB and the NCBs together. That is the essence of the problem: the ECB is the fulcrum of the euro and of the Eurosystem, it spins an excessively big wheel, but without a meaningful capital base of its own, and without its being backed by the ‘full faith and credit’ of a single political unit.2
How losses in the Eurosystem are dealt with
ECB losses are allocated to the capital accounts in the ECB’s books of each NCB in line with that NCB’s ‘Capital Key’. The ‘Capital Key’ is defined with reference to the Gross National Income and the population of the EU member state that the NCB represents, as a function of the EU totals. Put another way, the Bundesbank takes the biggest hit.
All these accounts will now be showing a negative balance once the 2024 loss has been distributed across them, although this is not reflected in the ECB’s annual report.
The ECB incurred the 2023 and 2024 losses itself. Losses on the Asset Purchase Programmes and the Pandemic Emergency Purchase Programme would be incurred by the NCBs, but be passed to the ECB, because they would be losses on ECB-mandated monetary policy operations, rather than losses the NCBs incurred themselves on their own operations.
Loss-making must now be strictly avoided – to avoid a call for new capital
A loss on the Asset Purchase Programmes or the Pandemic Emergency Purchase Programme would be a major one compared to the ECB’s 2023 and 2024 losses. It would exacerbate the ECB’s capital deficit and bring onto the table the possibility that the NCBs could be asked to pay in new capital.
This would be disastrous in three ways.
Firstly it would demonstrate that the ECB does not have a ‘full faith and credit’ backing from either the NCBs or the member states sitting behind the NCBs.
Secondly it would expose that, even if they had such backing in law from the NCBs, the NCBs have little or no capital themselves and would have to get the money in turn from their owners, the EU member states.
Thirdly, it would expose that almost all the EU member states would have to borrow the money: most are in deficit and eight are in the EU’s Excessive Deficit Procedure, having broken the Maastricht Treaty.3
Summary and conclusions
Negative capital of €0.2 billion is trivial for a normal central bank, and an annual loss of €7.9 billion is not disastrous in itself.
But the ECB is not a normal central bank. It neither has meaningful capital and reserves of its own, nor the ‘full faith and credit’ backing of anyone.
The backing it does have is conditional and revocable, and comes not from its direct owners but from the EU member states sitting behind them, many of whom have quite enough financial challenges as it is without the ECB adding to them.
The ECB’s negative capital position is a warning sign that the infrastructure behind the ECB – and therefore behind the euro – is weak and cannot be relied upon to support major loading.
1 https://www.ecb.europa.eu/press/annual-reports-financial-statements/annual/annual-accounts/html/ecb.annualaccounts2024~718377b1c1.en.html accessed on 24 February 2025
2 ‘Full faith and credit’ means that all tax-liable entities within the respective political unit (like Japan, the UK or USA) are bound in to paying the debt, unconditionally, irrevocably, and on a joint-and-several-liability basis: if all others fail to pay and only one tax-liable entity remains solvent, this ‘last man standing’ must pay the entirety of the debt
3 https://www.consilium.europa.eu/en/policies/excessive-deficit-procedure/ accessed on 24 February 2025
Photo by Markus Spiske
