Europe: public finances in minus and billions of euros in losses

The monetary tightening policy of the European Central Bank (ECB), which increased the interest rate from 2.5% to 4.5% over 2023, has slowed price growth, but has also caused billions of dollars in losses to both the budget of the European regulator and the budgets of central financial institutions in some Old Continent countries.

After 20 years of profits, the European Central Bank closed its 2023 budget with a loss of 1.266 billion euros. The negative budget is the result of the ECB’s struggle with high inflation and the consequence of tightening monetary policy. ECB chief Christine Lagarde said losses are “likely” to emerge in the coming years, but the return to “sustainable profits” is expected thereafter.

As European central banks make their calculations, the picture of the community’s finances is becoming increasingly alarming. De Nederlandsche Bank (DNB), or the Dutch central bank, recorded a negative result of almost €3.5 billion in 2023. The negative result for 2023 was due to “the European Central Bank raising interest rates during the year in order to reduce inflation.”

Much more worrying is the situation in Germany, where meanwhile the Bundesbank has recorded losses of €21.6 billion in 2023. This is another factor that could affect the ECB’s future monetary policy decisions. Last year, Germany’s government deficit amounted to 87.4 billion euros.

The increase of expenditures is caused by the rising interest rate on the Master Refinancing Operations (MRO) used to repay this liability. The increase in the MRO rate also led to the growing interest income accruing to the ECB’s share of the total number of euro banknotes in circulation and the interest expense paid to national central banks as remuneration for their loans, compared with the official reserves transferred to the European Central Bank.

Outside of Europe, the U.S. Federal Reserve also faces a loss of $114.3 billion in 2023.