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Eurozone M3 growth is even weaker if Germany is excluded

Broad money growth in the eurozone has been very weak since the onset of the Great Recession. While M3 is growing at a respectable rate in the UK and the USA, it has been pretty anaemic in the 18-nation single currency bloc with annual growth never rising above 3% in any of the last 18 months. If Germany is excluded, the figures are worse still. In fact, the quantity of money in the remaining 17 nations was lower at the end of June (the most recent month for which figures are available) than it was in August 2013 – 10 months earlier. Annual M3 growth has been negative in two of the last 18 months.

Weak money growth, or outright stagnation in the quantity of money, is crucial in understanding the absence of inflation. Given these figures, it is unsurprising that the most recent data indicate that five eurozone members - Spain, Portugal, Greece, Cyprus and Slovakia – are experiencing deflation, with Italy getting perilously close to joining their number. In Greece, which has suffered nearly 18 months of falling prices, the quantity of money is still less than it was at the end of 2011.

Banks in the Eurozone periphery remain vulnerable, with non-performing loans a major concern, notably in Greece and Cyprus. The “stress testing” by the ECB may well insist on higher capital ratios and thus further dampen any enthusiasm for risk. In such circumstances, money growth is unlikely to accelerate and deflation may spread unless the ECB commits itself to full-blown QE within the next few months.

Tim Congdon, Economic research, macroeconomic forecasting

Contact address: International Monetary Research Ltd., Huntley Manor, Huntley, Gloucestershire GL19 3HQ

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