Why money growth is a problem for the eurozone

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Why money growth is a problem for the eurozone

In this annual money week, macro economist Edin Mujagic draws attention to money growth. ‘The rule of thumb is: if the money supply grows faster than the real economy, then there is too much money in circulation.’ The past month shows money growth of 2.9 percent in the eurozone, the lowest rate since the introduction of the euro in 1999. That seems like good news, but there is a catch.

Money growth is seen as the yardstick for the outside world to determine whether or not a central bank is conducting too loose a monetary policy. “If you keep interest rates too low, more money will come in. And if you keep interest rates very high, less money comes in,’ says Mujagic. With regard to inflation, little growth is good news, ‘because less money added means a greater chance that inflation will not be too bad’.

Financial markets

However, this is less good news for financial markets, which after all thrive on liquidity. ‘And if this continues, it could lead to problems’, says Mujagic. “Money supply is really crucial. Now the growth is not too bad, but since 1999 there has only been too much money added.’

Little attention is paid to that, Mujagic thinks. Within the ECB, the European Central Bank, it is not discussed at all. So far: ‘It is striking that central bank administrators have paid attention to this in recent weeks. Never in recent years, however, it even seemed as if there was an internal fine for the use of the word.’ Mujagic is surprised, however, that although the ECB keeps saying that inflation is being kept low with its interest rate policy, ‘the money figures show something different’.

Also listen | Macro with Boot and Mujagić | The future of the euro

The past month shows the lowest money growth since the introduction of the euro. That seems like good news, but there is a catch. (Unsplash)

Euro entry

‘If you look at the period since the introduction of the euro in this way, then too much money has been added structurally in those more than twenty years. And you pay a price for that; eventually it will go into inflation or it will go into house prices or it will go into stocks or bonds. and that leads to bubbles and financial instability.’

Until 2003, the ECB had an official policy regarding money growth, which was not allowed to exceed 4.5 percent. ‘But coincidence or not, since that policy was released, the money supply has often grown between five and ten percent annually.’ Others, the US central bank, the Fed, also discontinued this policy in 2006. It would be too costly and irrelevant. Almost laughable,” says Mujagic.


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