Euro Area Money Supply Growth Collapses

While the main reason for the European debt crisis is fear that causes investors to flee perceived risky assets (and others to make speculative bets against them), one overlooked factor is the collapse in money upply growth.

Annual money supply (M1) growth has fallen from a high of 13.4% in August 2009 to 4.9% in October 2010. But if you look at 6-month and 3-month rates, it is clear that this number underestimates how tight monetary conditions are. The 6-month rate of increase is only an annualized 1.6% and the 3-month rate of increase is only an annualized 0.7%.

As this causes a general increase in interest rates, this collapse in money supply growth has aggravated the debt problems. However, if demand for euros continues to fall, the euro's exchange rate might continue to depreciate, despite the collapse in money supply growth.