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Preparing this rant about the widening milkyway between Eurozone economic growth and Euro production in the ECB and its printing presses spread evenly amongst Euro members proves one more time that the absoluteness of financial math and official figures are 2 pairs of shoes. Calculating GDP growth in the so called single market begins with problems of the data source.

GRAPH: According to data from the EU commission - the non-elected quick intervention troup towering above the European Parliament - I arrive at a total real GDP growth of 19,64% for the period from 2000 to 2008. Chart courtesy of tradingeconomics.com

Harmonization at even the most important levels like data integrity is a goal still to be attained, comparing the EU Commissions data with those of Eurostat, the EU's official statistical office.

GRAPH: GDP growth figures for the Eurozone's 15 members (Slovakia only joined this year) come in a tad smaller according to Eurostat. According to Eurostat's figures total GDP growth from 2000 to 2008 was 18,98% in real terms. Chart courtesy of Eurostat

I would have loved to provide readers with the absolute difference between these two official figures in nominal Euro figures (certainly many many billions,) but such are not available. Browsing Eurostat's and the EU commission's websites does not yield this information.

I would prefer nominal GDP figures as I have been having a problem with the dichotomy between the EU's/ECB's "official" inflation figures that diverge widely from the real devaluation of the Euro since its inception in 2001 for consumers (corporate and government accounts were converted a year earlier.)

Based on continuously changing consumer baskets in all Euro member countries I am reminded of Winston Churchill's quote that he only believed statistics he had falsified himself. Read more on the issue of juggling inflation figures in this earlier post. Although it deals mostly with US inflation figures you should get an idea of the manifold tricks invented to hide true inflation.

My anecdotal evidence stemming from criss-crossing the old world concludes that prices have effectively doubled in the last 10 years. This is a crass disparity to Eurostat's official figures.

GRAPH: Annual Eurozone Inflation according to Eurostat from 2000 to 2008. Chart courtesy of Eurostat.

Be it Germany where I paid €3,40 for a coffee in Berlin, about double of what it was in the hailed times of the ultra-hard Deutschmark, the Netherlands, where a single fare ticket for the Metro in Rotterdam is a whopping €3,50, or Venice/Italy where a single fare with the public vaporetti - boats - has exploded from 80 Euro cents to €6,50 since the introduction of the common currency, let me conclude that the real ascent of prices is closer to 7% annually since the formation of the Eurozone.

In my home country Austria gastronomy prices have been going through the roof. A simple lunch menu on Vienna's Naschmarkt where office clerks share tables with guys with ties has shot from an average of €4,35 in 2000 to €8,80 nowadays further elevates my skepticism about the true reflection of consumer prices in Eurostats HICP (Harmonised Index of Consumer Prices) figures.
Not that inflation would be a phenomenon limited to Euro members. An average lunch in the city centre of Bratislava/Slovakia, the youngest Euro member, has doubled from €5 to €10 in the last 10 years.

Recent Decline of Inflation Will Be Temporary

Seeing the upper echelons of the ECB jumping with joy about recent declines in HICP figures will be a short-lived spectacle. Italian ECB governing council member Lorenzo Bini-Smaghi told a conference on June 24 that there is a lively European debate whether we have to fear deflation or inflation more.

The debate between those who consider that inflation represents the main risk for advanced economies over the next few years and those who instead believe that deflation is the most immediate threat, has polarised, especially in the United States. It has also had an interesting echo here in Europe.
Both concerns are legitimate. To some extent, the fact that informed observers can maintain both views simultaneously can be seen as a sign that monetary policy is managing to walk the fine line between the two risks. The debate neatly encapsulates the trade-off currently facing policy-makers. They have to choose between short-term adjustments to strong recessionary forces and long-term macroeconomic stability. A key challenge is how to calibrate the policy response in the face of these forces: too timid a reaction may be costly in the near term, but an overreaction may sow the seeds of the next crisis. I will argue that a policy action that aims to ensure macroeconomic stability in the medium term requires a thorough examination of the risks, in much the same way as a disease calls for a sound diagnosis if it is to be properly treated.

They better hurry up with their diagnosis, as this crisis is far from over although my gut feeling tells me we will see a short-lived bounce this fall in economic activity before the whole mess caves in due to unsustainable debt levels on both public and private accounts.

GRAPH: A chart accompanying Bini-Smaghi's speech shows that future inflation expectations have significantly moved north since last November.(Click for larger image)

Enjoying blogger's freedom of speech I firstly expect significantly more true inflation based on the daily price shocks I experience when shopping or paying for public services which should be covered by taxes already. Double-charging has become the new norm in the leading debtor nations of the world, 9 of the first 10 of them being Eurozone countries.

Secondly I allow myself to remind the money printers in the ECB that no saver would ever fear deflation. Or would you mind if your weekly grocery bill would be lower?

The ECB's self-pride is based on clay feet though. A slowdown of M3 growth while the economy contracts still means there is more fiat money produced compared to the declining purchases of goods and services with these funny colorful papers that are only backed by the belief they will buy the same amount of goods and services in the future as they did in the past.

GRAPH: Absolute growth of money supply M3 clearly shows that even in a contracting economy (Q1: minus 4,8%) the ECB showers the Eurozone - or more exactly its banks with ever more money. The weekly financial statement to be released next Tuesday will show another upshot due to the record €442 billion 371-day "liquidity providing" tender

Not only nominal but also the relative change of M3 - hovering above the ECB's reference rate (whatever that means) shows that we are still experiencing monetary inflation at its best.

GRAPH: Don't get confused: Month-on-Month change of M3 is still way to high in order to return to the ECB's meaningless reference rate of 4.5% annual M3 growth, a growth rate it has never reached since the inception of the Euro. Chart courtesy ECB. Click for larger image.

Another way to see that the ECB will have to face runaway inflation is the comparison of weak GDP growth since 2000 and the balance sheet of the ECB. Repeating above mentioned meek economic growth of 18,98% or 19,64% (depending on the data source) lags far behind the 162% growth of the ECB's balance sheet between January 2000 and end of 2008. In absolute figures the balance sheet grew from €792 billion to €2,072 billion. This is a lot more money sloshing around in comparison to GDP growth.

While these additional €1.3 trillion (on Tuesday it will be €1.75 trillion) are now kept within the ailing banking sector who ran agog creating derivatives, thereby exploding leverage to dimensions never seen before in history, this money has to trickle through into the contracting economy, pushing up nominal and real prices at one point. After all, for every loser there is a winner who will try to maximize his gains again.

Gold Again Proves Its Role As Inflation Shield

Although the next chart from Gary Dorsch is a bit outdated, stemming from February 2008, it again proves the point that gold is a most reliable canary in the coal mine of monetary inflation.

GRAPH: Observing since a while that gold only gyrates against Federal Reserve Notes but remains more or less steady priced in Euros this year is another indication that the dollar's days will come to an end soon. Chart courtesy Gary Dorsch via MarketOracle.

I sign off with John Pierpoint Morgan's historical quote when asked by congress in 1907 what money actually is.

"Gold is money. Everything else is credit."

And finally I like to promote this phrase, brought to my attention by learntotradefutures.com publisher Duncan Robertson.

Gold is the money of kings.
Silver is the Money of merchants.
Barter is the money of peasants.
Debt is the money of slaves.

Source: One Eurozone but Many Sets of Growth and Price / Inflation Data