What more can the ECB do for the Euro?

Yesterday in something of a set piece event the new ECB President Christine Lagarde got out her pen to sign some banknotes and in the midst of her soaring rhetoric there were some interesting numbers.

In the euro area, banknotes are used for retail transactions more than any other means of payment. Some 79% of all transactions are carried out using cash, amounting to more than half of the total value of all payments.

So cash may no longer be king but it is still an important part of the Euro area economy. Indeed the numbers below suggest it may be an increasingly important part, perhaps driven by the fact that 0% is indeed better than the -0.5% deposit rate of the ECB.

And since their introduction, the number of euro banknotes in circulation has risen steadily, reflecting both the importance of cash in our economy and the euro’s international appeal. There are now 23 billion euro banknotes in circulation with a value of €1.26 trillion – a third of which are being used outside the euro area.

The latter reflection on use outside the Euro area is a rise because if we look elsewhere on the ECB website we are told this.

It is estimated that, in terms of value, between 20% and 25% of the euro banknotes in circulation are held outside the euro area, mainly in the neighbouring countries. The demand for euro banknotes rose steeply particularly in non-EU countries in eastern Europe when the financial crisis erupted in 2008 and national currencies depreciated against the euro.

We can figure out what was going on there as we recall the carry trade leading to mortgages and business borrowing being undertaken in Euros ( and Swiss Francs) in Eastern Europe. I guess that left some with a taste for the adventures of Stevie V.

Money talks, mmm-hmm-hmm, money talks
Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh

I am not sure as to why the foreign holdings have risen so much. Some will no doubt cheer lead saying it is a sign of Euro acceptance and strength but there is the issue of notes being potentially used by money launderers and drug smugglers. The ECB is supposed to be against such criminal activity and has used that reason in its ending of production of 500 Euro notes.The circulation of them is in a gentle decline and there are now 458 million of them. The numbers of 200 Euro notes has shot higher as there were 253 million a year ago as opposed to 366 million ( and rising) now.

I did ask the ECB and they pointed me towards this.

Euro cash holdings are widespread in Albania, Croatia, the Czech Republic, the Republic of North Macedonia and Serbia. In those five countries, an average of 36% of respondents reported holding euro cash……..

That still leaves a fair bit unanswered.

Money Supply

There was some good news for the Euro area economic outlook earlier from this.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 8.4% in October from 7.9% in September.

Here we are adding some electronic money to the cash above and we can see that the upwards trend seen in 2019 has been reinstated after last month’s dip. Or if you prefer we have returned to August!

This gives an explanation of how the services sector has held up as the trade war has hit manufacturing. According to the Markit PMI surveys this is especially true in France.

Service sector growth continued to run at one of the highest
recorded over the past year.

The Euro area and the ECB should be grateful for this as according to Matkit even with the monetary growth things in this quarter are weak.

“The eurozone economy remained becalmed for a
third successive month in November, with the
lacklustre PMI indicative of GDP growing at a
quarterly rate of just 0.1%, down from 0.2% in the
third quarter.”

If we switch to the longer-term outlook we see this.

The annual growth rate of the broad monetary aggregate M3 stood at 5.6% in October 2019, unchanged from the previous month, averaging 5.6% in the three months up to October.

I think we get the idea that it is 5.6%! Anyway as we know M1 rose the wider sectors must have fallen.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to 0.6% in October from 1.2% in September. The annual growth rate of marketable instruments (M3-M2) was -2.4% in October, compared with -1.1% in September.

The growth rate of 5.6% suggests a better economic outlook for 2021 and head but there is a catch which is this.

 net external assets contributed 3.0 percentage points (up from 2.8 percentage points)

The external influence has been growing over the past year or so and if we subtract it then broad money growth is a mere 2.6% and flashing a warning.

Official Surveys

Today’s releases were upbeat.

In November 2019, the Economic Sentiment Indicator (ESI) increased slightly in both the euro area (by 0.5 points to
101.3) and the EU (by 0.9 points to 100.0)……Amongst the largest euro-area economies, the ESI increased in Spain (+0.7), France and Germany (both by +0.4), while it remained virtually unchanged in Italy (-0.1) and worsened in the Netherlands (−1.0).

However there was another sign of trouble,trouble,trouble for manufacturing.

According to the bi-annual investment survey carried out in October/November this year, real investment in the
manufacturing industry in 2019 is expected to decrease by 2% in both the euro area and the EU. Compared to the
previous survey conducted in March/April this year, this represents a downward revision by 6 and 5 percentage
points for the euro area and the EU, respectively. For 2020, managers expect an increase in real investment by 1%
in both regions.

Care is needed with this series though because if you believed it wholesale Germany would be having a good year economically.


The ECB finds itself at something of a crossroads.Some elements here are simple as with a weak economy and blow target inflation then its policy easing looks justified.It does not seem to have many monetarists on board but it could easily argue that monetary growth is supporting the economy.

The more difficult elements come from how quickly it had to ease policy again as the ceasefire only lasted around ten months. This then brings into focus the question of why economic growth has been so weak? One way it is trying to answer this is provided by the way it has replaced someone who sometimes behaved like a politician with an actual one which suggests a bigger effort in this area.

“Countries with fiscal space should use it quickly, even more so when they suffer an asymmetric shock like Germany,” Villeroy told the Europlace international forum in Tokyo. “Those with high public debt should make their public finances more growth-friendly. ( Reuters)

Some of this is more French trolling of Germany but France has been more in favour of fiscal policy all along. As a side-effect by providing more bunds for the ECB to buy more fiscal policy from Germany would allow another expansion of monetary policy.

That leaves us with a curiosity that may become the equivalent of a singularity. Central banks have failed in the credit crunch era yet their importance rises and especially in the Euro area they seem to feel it is their role to dictate to politicians,




5 thoughts on “What more can the ECB do for the Euro?

  1. Great blog as usual, Shaun.
    The demand for euros in Balkan countries like Serbia that are outside of the euro area goes way beyond such nefarious activities as money laundering and drug smuggling. My brother-in-law in Kraljevo, Serbia made a contract for renovations to his home in euros where the work was to be done by a Serbian neighbour who lives on the same street. There is simply more confidence in the euro than there is in the Serbian dinar, so even transactions that don’t really involve huge sums often get made in euros. The hyperinflation in the Federal Republic of Yugoslavia under Milošević which peaked in Januarz 1994 was the third worst in world history, so it is hardly surprising that people are skeptical about their own monetary authorities and put more faith in Frankfurt. Susan L. Woodward wrote that economists can write all they want about optimal currency unions and so forth but a lot of people in the Balkans just don’t want to trust in national central banks anymore and that is why they see their future in the euro area. She wrote that in 1999 I believe, and mass migration into Europe and other things may have helped erode that sentiment among people there, but it obviously still exists. The only countries of any size that have euroized outside of the euro area are in the Balkans (Kosovo and Montenegro, both successor states to the FRY) and the only country that will be in ERM II next year is also a Balkan country, Bulgaria.

    • Hi Andrew and thank you

      I did not mean to imply that Serbia and other Balkan countries were dens of financial crime. What I was pointing out is that the ECB is contradicting itself by saying Euro bank notes are sources of crime and then being pleased there is more foreign use of the Euro.

      I understand more now about why Balkan countries want to join the Euro as they sound similar to Portugal that essentially lost faith in its own politicians and thus preferred Europe. As to the current situation it seems pretty much like everywhere else according to the National Bank of Serbia earlier this month.

      “Similarly to other countries in the region, as the contribution of food prices declined, primarily of vegetables in the new agricultural season, and in light of lower global oil prices, y-o-y inflation in Serbia decelerated in the past several months, reaching 1.1% in September.”

      Oh and this too.
      “At its meeting today, the NBS Executive Board cut the key policy rate to 2.25%, its new lowest level in the inflation targeting regime, whereby the NBS lends further support to credit and economic growth.”

  2. Hello Shaun,

    re: ” Central banks have failed in the credit crunch era ”

    Have they ? depends on your view point , I’d posit that they have done very well but only for themselves and their banking chums.


  3. ‘Dictate to politicians’….there you have it.

    Re the popularity of the Euro….the story has always been couched in terms of countries….”Greece should leave the Euro” etc. etc. But the reality on the ground is that many poorer citizens see their standard of living fall and much higher unemployment as wages remain sticky and never actually able to catch up with the productivity improvements of countries like Germany. But if you have money, then you don’t want to see it devalue, so within every Eurozone country, the most influential in society are wedded to a stronger, more reliable currency….even if it means hardship for their fellow citizens.

    And as with house prices, even the owner of the cheapest, most undesirable property will cheer on higher house prices, despite the fact that the overall effect on their and their children’s lives will end up being negative in the long run as all you have done is increase the overall cost of living. If you have a pathetically paying job but a small pot of hard earned savings, you are as keen not to see that devalue as much as the rich man. And that vested interest is what drives the so called ‘popularity’ of the Euro. Despite the effect again being negative in the long run to their and their children’s standard of living.

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