% annual growth rate:

M3Nominal GDP
1996- 20185.22%3.11%
1996 – 20004.62%4.13%
2001 – 20106.78%3.11%
Eight years to 20183.65%2.52%

Sources: M3 from European Central Bank and nominal GDP from IMF database, as at May 2019

The medium-term relationship between money and nominal GDP growth in the Eurozone, 1996-2018

Five-year moving averages of annual % changes, with 1998 being the start of the first five-year period.

Comment on monetary trends in the Eurozone

Europe’s various nations had different monetary experiences in the immediate post-war decades. Germany was committed to sound money policies. From 1974 its central bank, the Bundesbank, tried to meet targets for growth of the M3 quantity of money, and in general it delivered slower growth of the quantity of money and lower inflation than the central banks in other European countries. The Bundesbank’s success was so influential that its thinking dominated the early years of the single currency project (i.e., the introduction of the euro in place of the previous multiplicity of national monies) from 1999. As the table shows, in the five years from 1995 – 2000, the annual growth rate of M3 averaged 4.5% in what were to become the Eurozone member states. This was associated with nominal GDP growth of slightly less, 4.0% and negligible inflation.

Unfortunately, after the inception of the euro in 1999 banks in the so-called Club Med or ‘peripheral’ states could lend to their customers at much lower interest rates than before, provoking a big credit boom. The growth rate of money accelerated, reaching annual rates in excess of 10% in 2006 and 2007. A boom developed, which then had to be checked by the imposition of tougher rules on the banks by the European Central Bank, with the support of the Basle-based Bank for International Settlements. The four years to 2014 saw remarkably low increases in both M3 and nominal GDP. A further feature is that the post-2008 period has been characterised by wildly divergent changes in the quantity of money in different Eurozone member states. Nations which had saw the quantity of money collapse also saw deflation, whereas those with positive money growth had rising nominal GDP. The divergence became less apparent in 2017, although occasional short-lived spells of deflation persisted in some member states even into 2018.