Home > Uncategorized > Monetary developments in the Eurozone – the endogenous view

Monetary developments in the Eurozone – the endogenous view

Eurozone monetary statistics are, despite the monetarist leanings of many board members, deeply endogenous. The ECB monetary statistics really are of scientific quality. They show that money growth is a consequence of human actions and market exchange, not a cause. People and companies borrow and this borrowing creates loans as well as new deposits. Using this perspective (which the ECB itself only does to a very limited extent) to look at Eurozone money growth (graph) yields interesting insights:

Graph 1. Money growth in the Eurozone, Germany, ireland and Greece (% year on year increase, sources: Central Bank of Greece, ECB, Central Bank of Ireland, Bundesbank)


A. High money growth in Ireland around 2006 was caused by toxic ‘Ponzi financing’ of real estate projects – using an  ‘endogenous money’ perspective could have enabled the ECB to notice this and to take timely action (like promoting a land tax).
B. High money growth in Germany at this very moment is, looking at the detailed data for Germany, not so much caused by reckless lending but by a large change in the post ‘sonstige Aktivpositionen’ (other activa items) as well as a shift from savings to overnight deposits. Southern European people shifting their money to German accounts? Anyway: no signs of toxic ‘Ponzi financing’ of a real estate bubble (and too little of healthy, credit financed investments).
C. Monetary financing of the housing bubbles led, in the aggregate Eurozone, to even higher money growth than the re-unification of Germany
D. Monetary financing of the housing bubbles led, in Ireland, to even higher money growth than monetary financing of government deficits in Greece after 1980
E. Which, together, shows that the ECB exclusive and rather dogmatic Eurozone perspective on money growth and the neglect of national data is flawed and, as far as I’m concerned, contributed and still contributes to the present mess.

By the way – the ‘national contributions’ to Eurozone money growth should be redefined from ‘lending by national banks’ to ‘borrowing by national residents’ and ‘the national contributions to Eurozone debt growth’.

  1. Patrick Snyder
    January 5, 2013 at 7:33 pm

    What is the left-side scale? Percent? Please label your graphs correctly.

  2. January 5, 2013 at 10:00 pm

    Economists often confuse causality because they use and misinterpret simplistic econometric results. In this case, debt is a financial resource which can used for anything, real activity or speculation or anything else. A change of debt can result in a variety of economic changes, not necessarily real economic activity. ECB or Bernanke’s blunder is assuming: more money => more debt => more real investment/consumption => more employment. A long chain of unproven causality.

    • merijnknibbe
      January 6, 2013 at 9:01 am

      Exactly. And that’s why they should track (different kinds of) next to ‘Money’ and prices. In fact – they already do but the Bernankes just don’t care…

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.