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.
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
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.
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,