Euroland monetary trends are consistent with an ongoing, but slower, area-wide economic recovery. A big divergence, however, has opened up between core countries and the beleaguered periphery.

Narrow money M1, comprising currency in circulation and overnight deposits, is usually a better economic leading indicator than broader measures. The first chart shows six-month growth of M1 (i.e. overnight) deposits for Euroland as a whole and core / peripheral groupings. (There is no country breakdown of the currency component of M1. The country figures for deposits refer to holdings by Euroland residents at domestic banks.) Area-wide expansion has slowed but was still a solid 3.5% in August, or 7.1% annualised. This, however, conceals continued strong growth in the core – defined here as Belgium, France, Germany and the Netherlands – offset by contraction in peripheral countries – Greece, Ireland, Italy, Portugal and Spain.

M1 deposits warned of the recession, sliding in both the core and periphery from late 2007 ahead of a fall in Euroland GDP in the second quarter of 2008. A synchronised recovery, meanwhile, from late 2008 foreshadowed a rise in GDP beginning in the third quarter of 2009. Recent core / periphery divergence is unprecedented and dates from the escalation of the sovereign debt crisis in early 2010.

Part of the explanation is that money-holders in peripheral countries have transferred funds to foreign banks perceived to be safer, either because of less exposure to bubble excesses or implicit backing from governments with stronger fiscal positions. The economic implications, though, are still negative – deposit outflows have tightened monetary and credit conditions and money held abroad is less likely to be spent on domestic goods and services.

A country breakdown shows that weakness has been most acute in Greece and Ireland, with Italy relatively resilient – second chart. Spanish trends have deteriorated sharply, with deposits contracting at a similar pace to that preceding the recession.