EU Weakness In Two Monetary Charts

Includes: EU
by: Hale Stewart

Yesterday, I argued that we should begin referring to the EU economy as one in permanent recession. Between the austerity obsession at the federal level and the ECB's unwillingness to confront deflation head-on, this description seems more than appropriate. But looking into the details of the EU macro-economy further facts emerge that show the depth of the problem. Consider this chart of loan growth (or lack thereof):

Since the end of the recession, the ECB has kept rates at very low levels with the obvious intent to encourage loans. This is supposed to be simple supply and demand at work; lower the cost of the product and people will buy more. However, net loan growth was at low levels until 2012 when it dropped further into negative territory. The underlying reason for this decrease is obvious: Businesses aren't going to invest in a weak growth environment.

The overall pace of M3 and M1 growth is still weak, despite rates being at record low levels. After the recession, M3's growth increased at rates similar to those before the recession. However, this rate of growth quickly declined and only rebounded to a weaker level in 2012. And M1 is increasing at far lower levels than desired. Both of these charts show there is a fundamental weakness in overall demand for consumers (M1) and businesses (M3).

Hale Stewart,