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So what is the problem? Why was a warning given earlier that recent financial developments are “deeply worrying” for the eurozone? The trouble is that in the last few months money growth has been sliding. In the first four months of 2018 the quantity of money went up by only 0.8 per cent. If that continued for a year, the figure would be a mere 2.5 per cent, much as it was in the stressful six years from 2008. Moreover, the figure is likely to go down further in the rest of 2018.

For the time being the ECB is still buying assets and so taking steps to increase the quantity of money. But an announcement has been made that the asset purchases will end in September. It is even conceivable that money growth will come to a complete halt. No doubt many economists dislike Milton Friedman and a monetary interpretation of macroeconomic developments. All the same, given the eurozone evidence since the start of the new currency, only an extreme optimist could dismiss the risk of a renewed recession if money growth does indeed tumble to zero.

Draghi has been an astute operator. He deserves all the praise he has received for keeping the inherently dysfunctional eurozone in being. Defenders of the single currency might say that he can ensure that appropriate measures remain in place later this year and in 2019 to prevent too extreme a deceleration in money growth. Unfortunately, that is not the position. Draghi’s term ends in November 2019, but already other personalities with different views are coming to dominate the ECB power hierarchy. A key drawback of Draghi’s two main policy innovations — the long-term, low-cost loans to weak banks, and the large-scale asset purchases — is that they discriminate between countries.

The loans have been particularly to banks that have high levels of bad debts on their books, and far too many of them are in Italy; the asset purchases have included large quantities of Italian government bonds, when it is Italy that has a particularly heavy burden of public debt. In short, Italy has benefited disproportionately from Draghi’s cleverness and guile. His successor will probably come from northern Europe (or perhaps France, as a compromise), and may try to reverse some of the decisions taken since November 2011. The Protestant work ethic, with its disapproval of easy money and short-term expedients, is about to confront the Club Med mentality. If the ECB does take away the two crutches that have kept money growth positive at about 5 per cent in the last three and a half years, and if money growth does in fact return to where it was in the 2008-14 period, the eurozone will again be the cripple of the international monetary scene.

Or will it? Many economists dispute that money is of any relevance to demand, output, employment and the price level, and will continue to be rude about Milton Friedman and his intellectual legacy. Interesting events and a fascinating debate lie ahead.
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untenured
July 9th, 2018
11:07 AM
"our analysis will have a deeply worrying message for those who believe — as Europe’s single currency approaches its 20th birthday — that its future is secure." It is secure because it is one of the essential constituents of the Average Empire, which is the proper description of the EU, whatever it pays its PR to say. All the EU has achieved in its short history is the ruination of its statelets, with its ceaseless determination to lay down regulations which, it is told, will make it ever more popular.

Anonymous
July 4th, 2018
9:07 AM
Whoever replaces Sr. Draghi, they just need an enigmatic smile and the ability to watch the ballooning ECB balance sheet expand relentlessly. A cryptic statement from time to time, will keep the economist community happy as they obsess over QE and ignore ZIRP.

Anonymous
June 29th, 2018
9:06 AM
Sr. Draghi's only responsibility is to take in any delinquent loan denominated in €, put it in the safe with all the others and hand the bearer a brand new shiny ECB version in exchange. It means that when, let's say Germany, comes along to be paid out, they will be invited to root around in the safe and find something that's worth more than the paper it's written on. Fat chance.

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