Eurozone real narrow money, M1, has stagnated over the last six months, suggesting that economic growth will slow sharply in early 2011 – see previous post.
M1 comprises currency in circulation and overnight deposits. The first chart shows the six-month change in real overnight deposits broken between the "core" and "periphery" (currency figures are not available by country).
The pace of contraction in the peripheral group eased in October but still signals economic stagnation, at best, in early 2011. The further fall in Eurozone-wide growth last month reflected a loss of momentum in the core, casting doubt on the ability of these economies to continue to decouple from peripheral weakness.
The second and third charts show a country breakdown. Real M1 deposits have contracted over the last six months in all five peripheral economies and also in Belgium and the Netherlands.
The ECB may have contributed to this weakness: its decision to withdraw 12- and six-month lending facilities has resulted in a 20% fall in the monetary base since June, in turn pushing up EONIA and increasing funding pressures on struggling banks. A reinjection of liquidity is urgently required but policy-makers are reluctant to reopen the lending window for fear of being swamped by demand from weaker sovereigns seeking back-door support via local banks.
