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  % annual/annualised growth rate:  
  M3 Nominal GDP
1995 – 2014 5.3 3.1
Four years to 2014 2.6 1.3
Year to June 2015 5.0 n/a
Three months to June 2015 at annualised rate 4.4 n/a

Sources: European Central Bank and International Monetary Research Ltd. estimates



Money growth satisfactory, but QE might have had stronger effect

Summary: Eurozone broad money growth seems to be running, with some consistency, at a higher rate than in the years immediately after the Great Recession. However, M3 growth in June itself was €34b., compared with €13b. in May and €67b. in April, leading to an annualised growth rate in the three months of 4.4%. This is satisfactory, but perhaps on the low side given that the ECB is now pursuing its ‘quantitative easing’ programme. Despite the hullabaloo about Greece, the macroeconomic prospect is more benign that at any time since the Great Recession.  

As the chart shows, Eurozone money growth has perked up over the last nine months or so. The period since the end of February has benefited from the QE programme, with its planned €60b. of securities purchases each month. However, money growth since end-February has been somewhat beneath that in the immediately preceding quarter, which is surprising and perhaps a little disappointing. The ECB press release notes that in the year to June M3 rose by 5.0%, with deposits in the hands of households and companies increasing slightly less than this. By implication, deposits held by long-term investing institutions have expanded faster – perhaps much faster – than M3 as a whole. This is part of the explanation for the buoyancy of European stock markets in 2015.

The QE operations started in March and ought to be identifiable in the ECB’s balance sheet on the liabilities side of the balance sheet, as ‘liabilities to euro area credit institutions’ (i.e., banks’ cash reserves). On 27th February the ECB had liabilities to euro area credit institutions of €292.0b. On 24th July (the last date available) these liabilities had soared to €503.8b., a movement of just over €211.8b. in the four months, which is slightly behind the ECB’s objective of €60b. a month. As International Monetary Research has emphasized in several places, the purchases of securities need to be from domestic non-banks, in order directly to boost broad money. (Purchases of securities from banks expand banks’ cash reserves, and that may cause the banks to seek extra assets and create more money. But this further stage [i.e., of money creation to lower the ratio of banks’ cash to total assets] does not necessarily follow.)

Consumer prices (“prices in the shops”) rose by 0.2% in the year to June, while producer prices fell. In that context Eurozone real (i.e., inflation-adjusted) money growth is the highest it has been since before the Great Recession. The media are full of angst about the Greek situation, but in fact Eurozone money trends have a more encouraging message for the macro outlook than for over eight years.

  % annual growth rate:  
M3 Nominal GDP
1995- 2014 5.3 3.1
1995 – 2000 4.5 4.0
2001 – 2010 6.7 3.4
Four years to 2014 2.6 1.3