There is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.
With the ECB unable and unwilling to engage in outright unsterilized credit creation (i.e., pumping low powered money into banks which can then invest in businesses buy stocks), the only hope for European growth is that its commercial banks will be net lenders and thus net contributors of credit money to the economy. However, as we first discussed over a year ago, Europe simply no longer has the debt capacity (either secured through unencumbered assets, or unsecured through future cash flow) against which banks can lend. Today's M3 data simply confirmed that for Europe a long, hard painful slog is best it can hope for. That is, assuming of course, the soaring unemployment, deteriorating demographics and collapsing welfare state do not lead to a revolution first as Wolfi Schaeuble warned yesterday.
The broad monetary aggregate M3 expanded by €15 bn in April. We see this expansion as a technical correction from last month’s report. In fact, last month’s deceleration of M3 was largely attributed to the Cyprus events. However, the broad aggregate is still growing at a slow pace, well below its reference value of 4.5%. On the credit side, there is no sign of improvement. In fact, credit to the euro area private sector is contracting further to -0.9% yoy from -0.7% yoy.
Looking at the country level, we still see signs of credit crunch in the peripheral economies. In Spain, outstanding loan to non financial corporation is contracting at -19.1%. Yet, there is little incentive to borrow given the lack of confidence in future growth.
The key charts that matter: Eurozone M3 and net lending. The blue line is what should be happening. The brown line is what is happening.
And a nation by nation breakdown. Oops, Spain.
All of the above is the bad news.
The good news is that for now at least Europe still is the proud recipient of exogenous credit creation, mostly from Japan and assorted US hedge funds, as well as various European banks rehypothecating sovereign bonds with the ECB. This has prevented the economic reality from spilling over into the bond sector as it did in 2010, 2011 and 2012. Soon the carry arb will disappear and slowly but surely European peripheral bonds will resume their traditional trading pattern, which will return the crisis squarely where it belongs.
In the meantime, Europe is delighted that it has bought itself some time in which to enact the structural reforms so desperately needed to make it a viable going concern. Oh wait, as the ECB reported today Europe never did any of that because politicians were hoping and praying the bankers would fix it all.