Wednesday, 19 August 2026
The end of Europe’s ultra-low interest-rate era has exposed an unusual consequence of the monetary policies used during the financial crisis, the pandemic and the years of persistently weak inflation: central banks are now carrying substantial financial costs associated with the large balance sheets accumulated during that period.
An analysis by Pedro Gómez Martín-Romo argues that this legacy should trigger a wider examination of how the European Central Bank conducts monetary policy and whether its reliance on interest rates and remunerated bank reserves has created unintended economic and distributional effects. The paper is deliberately provocative, framing the issue through the question of whether the ECB has committed a “mortal sin”, but its underlying argument concerns a genuine policy debate over the costs and consequences of running monetary policy in a banking system containing trillions of euros of excess liquidity.
One of the paper’s current factual claims is correct. The ECB increased all three of its principal interest rates by 25 basis points in June 2026 as renewed inflation pressure emerged from higher energy costs linked to the Middle East conflict. The deposit facility rate consequently increased to 2.25%, the main refinancing rate to 2.40% and the marginal lending rate to 2.65%, effective from 17 June.
However, the paper’s description of approximately €2.5 trillion of bank reserves as money that the European economy simply “does not need” goes beyond what official data establish. The Eurosystem still had around €2.6 trillion of credit institutions’ reserve holdings, including use of the deposit facility, at the end of 2025, but the ECB treats this as a consequence of its balance-sheet structure and previous asset purchases rather than as a calculable amount of unnecessary money.
Excess liquidity has already fallen substantially from its peak. It reached approximately €4.75 trillion in late 2022 before declining as banks repaid targeted refinancing operations and securities purchased under earlier programmes were allowed to mature without full reinvestment.
The distinction is important. Gómez Martín-Romo calculates that the euro area has issued approximately 14.9% more money than necessary and describes €2.47 trillion as monetary overcapacity. That figure is derived from his own comparison between monetary aggregates and GDP rather than from an officially recognised measure of surplus money, so it should be understood as the author’s theoretical conclusion rather than an established economic statistic.
There is stronger evidence behind his broader concern about central-bank losses.
The ECB reported a loss of €7.9 billion in 2024 and another €1.25 billion in 2025. The smaller 2025 loss reflected a reduction in net interest expenditure. The ECB attributes these losses to the financial structure created by earlier policy interventions, under which it accumulated large quantities of longer-duration, mostly fixed-rate assets before later having to pay higher interest on liabilities as monetary policy tightened.
This is a genuine financial consequence of the transition from quantitative easing and negative interest rates towards a tighter monetary environment.
National central banks have experienced similar effects. Banco de España recorded operating losses of €6.612 billion in 2023 and €7.549 billion in 2024, although existing financial provisions allowed it to report a final result of zero rather than a negative annual profit.
This confirms one of the paper’s important points: monetary policy can affect central-bank profitability and therefore indirectly public finances, because profits that would normally be transferred to national governments can disappear during periods of losses.
The paper is also correct that the Eurosystem currently remunerates reserves above minimum requirements through the deposit facility. In an environment of abundant liquidity, the ECB uses the deposit facility rate as the principal mechanism for steering short-term market rates and transmitting monetary policy across the euro area.
Where the interpretation becomes contested is in describing those payments simply as a subsidy to commercial banks.
Critics, including economists cited by Gómez Martín-Romo, argue that paying interest on very large reserve balances transfers substantial income to the banking sector and creates an unnecessarily high public-sector cost. The paper estimates that remuneration of non-mandatory reserves amounted to approximately €40.3 billion between 2023 and 2025.
The ECB takes a different view. Its position is that remunerating excess liquidity is part of the operational mechanism through which tighter interest-rate policy reaches money markets and ultimately financing conditions throughout the economy. The payments are therefore not designed primarily as a return to banks, but as part of the transmission system used when reserves remain abundant.
That disagreement represents a legitimate monetary-policy debate rather than a simple factual error on either side.
Gómez Martín-Romo proposes a very different approach. Instead of remunerating excess reserves, he argues that the ECB should make greater use of minimum-reserve requirements to absorb liquidity. His wider framework goes further, proposing that money creation should follow predetermined rules and that the ECB should no longer set a common market interest rate in its present form.
These proposals are unconventional and should be understood as the author’s own monetary framework rather than as mainstream alternatives currently being considered by the ECB.
The paper also challenges the foundations of the ECB’s 2% inflation target, suggesting that the number ultimately emerged from New Zealand’s early inflation-targeting experiment rather than from a precise economic law. There is historical basis for identifying New Zealand in 1989 as a pioneer of formal inflation targeting, but describing the ECB’s present 2% objective as simply an arbitrary number copied from that episode would be too simplistic.
The ECB’s current symmetric 2% target was reaffirmed after a detailed strategy review. Its rationale includes protection against deflation, greater room to cut rates during downturns, accommodation of downward wage rigidities and the risk of measurement error in inflation statistics.
For the property sector, the more interesting part of the paper concerns the long period of exceptionally cheap capital.
Gómez Martín-Romo argues that monetary expansion initially flowed into financial and real assets before appearing more broadly in consumer prices. From that, he links ECB policy directly to the increase in European housing values and ultimately to today’s affordability problems.
That causal claim is too strong if presented on its own. Housing prices are influenced by many factors, including land availability, planning constraints, construction costs, population growth, household formation, mortgage supply and the availability of new housing.
There is, however, substantial evidence supporting the narrower proposition that interest rates have a powerful influence on property valuations.
Years of low rates reduced the cost of borrowing, increased household and investor purchasing capacity and lowered the discount rates applied to future property income. These conditions supported higher valuations across both residential and commercial markets.
When inflation subsequently accelerated and central banks raised rates quickly, the same mechanism operated in reverse.
Commercial property repriced as debt costs increased and investors demanded higher yields. Residential buyers encountered more expensive mortgages, reducing affordability even where housing prices did not immediately fall enough to offset the increase in financing costs.
Europe therefore entered the post-2022 period with a difficult combination: asset values established during a period of exceptionally inexpensive money and financing conditions that had suddenly become much more restrictive.
That does not mean monetary policy alone created Europe’s housing affordability crisis. In many markets, insufficient housing construction, lengthy planning procedures and structural supply shortages remain fundamental problems. But monetary policy strongly influenced the financing environment in which those shortages were priced.
Another important issue concerns the timing of the inflation surge.
The paper argues that monetary expansion itself explains the jump in inflation and criticises the ECB for continuing asset purchases after inflation began accelerating in 2021. It is correct that inflation rose sharply through 2021, reached about 10% in the euro area by October 2022 and that the ECB did not begin raising rates until July 2022.
However, attributing the inflation episode principally to money growth does not reflect the full evidence.
The pandemic, supply-chain disruption, Russia’s invasion of Ukraine and the resulting energy and food shocks played major roles in the initial inflation surge. Monetary and fiscal conditions also supported demand, but external supply shocks were a substantial part of the episode.
The paper is therefore strongest when it asks whether the ECB maintained highly accommodative policy for too long, rather than when it presents monetary expansion as a single explanation for inflation.
Its broader argument about central-bank discretion is more philosophical than empirical.
Gómez Martín-Romo believes policymakers should operate within stricter predetermined monetary rules because central bankers are subject to imperfect information, forecasting errors and political pressure. Drawing on earlier monetary thinkers, including Milton Friedman, he argues that limiting discretion could reduce the risk of major policy mistakes.
The counterargument is that rigid monetary rules can perform poorly when economies face shocks that formulas cannot anticipate, including pandemics, financial crises, wars and severe energy disruptions. Even the author’s own proposed system acknowledges that exceptional events would require deviations from normal rules.
For real estate investors, the broader lesson from the debate is less ideological.
The investment cycle that followed the global financial crisis was shaped to an extraordinary degree by central-bank policy. Property markets benefited from cheap financing, abundant liquidity and declining yields. The subsequent inflation shock demonstrated how quickly those conditions could reverse.
Today, the consequences remain visible in asset values, development feasibility, refinancing requirements and housing affordability.
At the same time, the ECB and national central banks are absorbing the financial consequences of moving from a world of negative rates and quantitative easing towards one in which very large reserve balances have to be remunerated at positive policy rates.
That creates an unusual legacy from the previous monetary cycle. Policies that helped stabilise markets and economic activity during successive crises also produced balance sheets that became expensive once interest rates moved sharply higher.
It is therefore reasonable to ask whether the framework should evolve. But the evidence supports a more nuanced conclusion than the paper’s “mortal sin” metaphor.
The ECB did not single-handedly cause Europe’s inflation or housing crisis, nor can today’s reserve balances simply be classified as €2.5 trillion of unnecessary money. What can be demonstrated is that extraordinary monetary policies adopted during successive crises reshaped financial markets, property valuations and central-bank balance sheets in ways that continue to influence Europe’s economy today.
For commercial real estate, the most lasting consequence may be that the sector is still repricing decisions made under a monetary regime that no longer exists. Assets, debt structures and development assumptions established during years of exceptionally cheap capital are now being tested against a fundamentally different cost of money.
