A blog post from the European Central Bank last week signalled the end of its post-pandemic stimulus measures.
The ECB forecasts excess liquidity deposited with it by eurozone banks to fall from a peak of US$5.65 trillion in 2020 to $3 trillion this year, and below $2.3 trillion in 2027, returning to pre-pandemic levels.
The surplus liquidity originated from the ECB’s emergency asset purchase programme in March 2020, which was discontinued two years later.
Meanwhile, the share of lenders holding reserves close to their preferred rather than abundant levels is expected to rise from less than 20% in 2024 to almost 60% this year.
But Covid-19 and its aftermath are now just one in a string of destabilising changes to the macroeconomic environment. Exogenous shocks of every kind are increasingly becoming the new normal.
According to a recent report in The Wall Street Journal, European banks are nearing the end of a three-year bull run because of inflation fears and a poor growth outlook stemming from the war in the Middle East.
Given the healthy normalisation of banking reserves in Europe, lenders in the region might want to resume issuing unsecured euro bonds, as recommended in a Global Capital article last month. Some have tapped dollar bond markets amid the war, but not their own back yard.
According to the article, increased eurozone issuance in difficult times might deepen European capital markets and reduce reliance on the increasingly flaky dollar market.
The ECB, meanwhile, is finalising a digital euro to ensure the common currency stays competitive against the dollar in global digital finance, saying that this is an opportunity for banks to bolster their business models.
A consortium of major European bank plans to launch Qivalis, a euro-pegged stablecoin, in the second half of 2026.
More than one crisis readjustment might be on the cards for Europe.
