By the end of this year, the European Central Bank is expected to end its monthly net asset purchases. This raises several questions about the ECB’s reinvestment strategy and the implications for individual countries. So far, it is only clear that the ECB intends to replace maturing bonds and aims for the overall size of the balance sheet to stay constant.

In a series of OMFIF Commentaries from October, David Marsh and Ben Robinson wrote that an adjustment in the capital key – under which bonds are bought in proportion to the share of the ECB capital provided by each country – may adversely affect some member countries in this context. They explored alternative reinvestment strategies, including a five-year adjustment period, freezing the 2018 bond-purchase quota and country specific maturities structures (longer on Italy, shorter on Germany) to offset potential disadvantages.

The idea that a change in quota could disadvantage a country is surprising, as bond-purchases were designed to minimise, if not eliminate, fiscal implications. The ECB is not buying bonds directly from states. Furthermore, it respects a two-year (later reduced to one-year) minimum trading period, to avoid suspicion of monetary financing. This issue was fiercely debated in the German constitutional court in 2015. It eventually accepted (though did not endorse or totally agree with) the European courts’ ruling on classifying these purchases as part of monetary policy.

Other commentators went further still. They not only claimed quantitative easing was neutral from a fiscal perspective, but argued that countries whose bonds were purchased were losing out. This is because the interest payments are shared with the ECB’s capital key. It is surprising that those worried about the capital key reduction did not express the same concerns about fiscal implications, in response to this line of reasoning, when QE began.

A reduction of bond purchases would not only be a fiscal issue, but also a liquidity issue. It may cut the liquidity provided to banks and thus worsen the situation in countries (like Italy) where banks are in critical conditions. If this is the key concern, however, it is puzzling why it is being expressed now. Most of the liquidity created by the ECB’s QE Programme has not stayed within the borders of the country that purchased the bonds right from the beginning. This is visible in the ever-increasing Target-2 balances, which are approaching claims worth €1tn for Germany and €500bn of liabilities for Italy. The Deutsche Bundesbank was obligated to credit the money for bond purchases on recipients’ reserve accounts whenever the seller of the bonds wanted to receive its payment in Germany.

This has implications for the wealth of individual countries. Whereas prior to QE Italy owed money to private investors in Frankfurt, London or New York that had a due date and interest rate, it now owes the same amount to the rest of the Eurosystem, with an open-ended maturity for as long as reinvestments take place.

This illustrates that QE was not as successful as believed. The real issue for the ECB governing council to address when discussing fiscal implications of reinvestment is the risk arising from the misallocation of liquidity and corresponding claims and liabilities. If Italy exited the euro area and kept the purchased assets while not honouring the liabilities, this could lead to catastrophic losses for remaining member states.

A settlement of these liabilities – broadly similar to the US Federal Reserve System’s interdistrict settlement accounts accounts – should be part of the ECB’s new reinvestment and rebalancing strategy.

Frank Westermann is Professor of Economics at Osnabrück University.