The European Central Bank is winding down nearly €3 trillion in emergency pandemic liquidity, with excess bank deposits at the ECB set to fall below €2 trillion next year. This marks the end of an era for the central bank's aggressive stimulus measures that began in March 2020 with the Pandemic Emergency Purchase Programme (PEPP).

From 2020 to 2022, the ECB's balance sheet ballooned as it purchased government and corporate bonds while offering generous refinancing to banks. The policy successfully prevented economic collapse when interest rates were already negative, but critics argue it distorted asset prices and fueled real estate booms in countries like Germany. The stimulus has also been blamed for contributing to surging inflation from late 2021.

Unlike traditional quantitative tightening, the ECB isn't actively selling bonds but allowing them to mature without reinvestment. Since late 2024, excess liquidity has declined by nearly 50% and will continue shrinking through 2027. Isabel Schnabel, an ECB executive board member, describes this as "quantitative normalisation rather than quantitative tightening." The central bank reports the transition is proceeding smoothly without signs of market fragmentation, though banks will need to manage liquidity more actively through money markets and standard refinancing operations.