Weekly e-mail from Tim Congdon of International Monetary Research Ltd. – 30th November, 2010
Brief upturn in Eurozone M3 is fading
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The first half of 2010 saw a potentially encouraging development in Eurozone money growth, with a return to growth – even if very slow growth – in M3. The resumption in money growth was most well-defined in Germany, where it owed much (in terms of the credit counterparts) to banks‟ purchases of government securities. On 22nd October I prepared a weekly e-mail noting the better numbers. I also expressed the hope that they foreshadowed a wider preparedness on the part of policy-makers to monetize budget deficits, in order to maintain money growth at a positive, although moderate, rate. (If banks are being forced to shrink risk assets – as is currently the case – some degree of deficit monetization is the only way to keep the quantity of money growing.)
The purpose of this e-mail is merely to update the story. It turns out that in the last two months Eurozone M3 has fallen slightly. The fall is not catastrophic, but my hopes of a sustained resumption of money growth have not been met. In last week‟s e-mail I was very critical of the ECB‟s current neglect of „the second pillar‟, i.e., the monetary analysis which in the Bundesbank tradition argued for low, stable growth of broad money. In fact, as far as I can see, the ECB‟s researchers are in such chaos over the various threats to the integrity of the Eurozone that they are indifferent to the stagnation of M3 since late 2008 and have no meaningful agenda to end it. The upward blip in M3 in the spring and summer of 2010 was an accident, not the result of deliberate policy. Eurozone leading indicator indices are fairly satisfactory at present, particularly for the core countries (Germany, France and so on), but early 2011 will see persisting macroeconomic agony in the peripheral PIGS nations (i.e., Portugal, Ireland, Greece and Spain). The Eurozone needs the deliberate creation of money by the state (i.e., “quantitative easing”), but that is not in prospect in the next few months. The Eurozone‟s strains will continue.
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The latest Eurozone money trends
The ECB has just published the October M3 number. It was the second fall in a row, so that the three-month annualised rate of change is now down to almost nothing. The chart below asks, ‘as an upturn [in money growth] started?’. The answer is ‘no, not on a sustained basis’. (See the violet line in the chart below. In August Eurozone M3 jumped by 0.9% in the month, i.e., at an annualised 12%. This was heartening, but it seems in fact to have been a flash in the pan.)
With the banks in the peripheral PIGS countries still having immense difficulty in funding existing assets, and so under pressure to shrink balance sheets and liabilities, a resumption in the growth of bank balance sheets – and hence in M3 – for the Eurozone as a whole is heavily dependent on banking policy in the core countries. Attitudes in the ECB, the Bundesbank and so on are largely a matter of conjecture, but the signs are that policy-makers have no organized plan to boost Eurozone money growth. (There is an obvious contrast with the Bank of England, which introduced ‘quantitative easing’ in March 2009 deliberately to boost broad money, and – more debatably – the Federal Reserve, which has set about so-called ‘QE2’ in recent weeks.)
Since the PIGS countries cannot devalue, the easiest escape–route from their current macroeconomic agony would be a marked easing of monetary conditions in their main trading and financial partners, i.e., the other members of the Eurozone. But that does not appear to be in prospect. The early months of 2011 will see continued severe macroeconomic strains in the PIGS group, accompanied by worries about the break-up of the Eurozone.
-10-5051015% Crash in Eurozone money growth appears to be over: has an upturn started? Annual rate of change Three-month annualised rate of changeLatest value is October2010
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