Saturday, December 31, 2011

The ECB's easy monetary policy is not getting to the "periphery"

The monetary contraction in Italy has been continuing, with money supply indicators all showing negative growth.  Here are the latest monetary aggregate contributions to the eurozone from Italy's central bank:

 Banca D'Italia: Italy's contribution to the eurozone money supply (percent YOY)

But shouldn't the ECB's continuing expansion of the balance sheet have some positive impact on Italy's liquidity?  Below are the money supply measures showing year over year growth for the eurozone as a whole.

ECB: total eurozone monetary aggregates growth YOY

The growth is moderately positive at around 2% year over year.  This means the liquidity in the eurozone as a whole is expanding, while Italy's is contracting.  But the eurozone is a "closed system" - if the monetary conditions are contracting in one nation, they must be expanding elsewhere to keep the whole euro area liquidity growing at the 2% level.

As expected, that monetary expansion is in fact taking place in Germany with M2 and M3 growth rates in the 6-7% range.

Bundesbank: Germany's contribution to the eurozone monetary aggregates (percent YOY)
What this shows is that liquidity is not getting to the ECB's target, the "periphery", whose economies are facing a recession.  Instead the monetary expansion is ending up at the "core", making the ECB's policy of easing far less effective. This disparity is also setting up a potential future conflict between Bundesbank and the ECB as the impact of monetary policy is not felt uniformly across the eurozone.
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