What Keeps Mario Draghi Up At Night, And Why The European Depression Has A Ways To Go

Today's entertaining European PMI data has gotten quite a few participants excited, with some of the more tabloidy elements even proclaiming that the recovery has arrived. Amusing: one wonders if they did the same when the European PMI printed above 50 the last time around Europe "telegraphed" a recovery back in early 2012 only to crash and burn promptly thereafter.

The answer, of course, is rhetorical. Sadly for Europe, not its subsidized industrial complex, what PMI does is a month to month phenomenon driven by FX, government injections, and restocking cycles. A far more important question to the overall European economy caught in a Keynesian debt trap is what is happening with credit creation. It is here that the true fundamental problem affecting Europe is exposed and demonstrates precisely what it is that keeps Mario Draghi up at night.

Presenting Europe's annual change in M3, alongside the far more important bank lending to the Euro area private sector. It is the latter which just dipped at a record low, indicating once more that Europe's monetary transmission mechanism is not only clogged up (a rising M3 should have a favorable impact here) but hopelessly broken. In other words, it is the brown line in the chart below that is what is giving the ECB chairman nightmares, and is leading to such secondary effects as record high unemployment and negative GDP growth virtually across the entire Eurozone.

And here is SocGen with its take on the only chart that matters in Europe:

The May 2013 M3 growth figure weakened as expected from 3.2% yoy to 2.9% yoy. This weakening was mainly explained by base effects but money growth is nevertheless much below its reference value. Growth in the money supply has lately been driven by a preference for liquidity which led to strong inflows into overnight deposits. Increases in the stocks of domestic government bonds and in the capital inflows in the euro area have also been supporting M3 growth. On the counterpart side, net redemption of private loans is weighing down on M3 and growth in bank lending to the private sector is still firmly in negative territory. For June we expect more of the same in the absence of any notable shock in the euro area and M3 growth should be stable at 2.9% yoy. However, it is unclear how much the talks of tapering in the US could have affected this number and risks are on the downside.

So much for a "recovery."