European Central Bank (ECB) has drained monetary reserves
If one wonders why there is such a bifurcated world between an ever growing US economy and a recessionary economy such as Europe, look no further than the Central Banks. While the US Fed added over $3 Trillion in funny money to our banking system Europe added just 1.6 Trillion Euros and then promptly sucked half of these vaults of money dry since 2013.
When Europe fell back into recession in 2011 Money growth went parabolic again. The ECB contraction of money the past 2 years initially signified growing confidence in a self-sustaining recovery. With Europe far less cohesive than the US they are far slower to act. They perhaps know they need to find some new means of stimulus but being slowly reactive they are waiting for the levels of anxiety to rise to a cresendo. With Russia’s Ukraine led export collapse throwing Germany into the same camp as the poor neighbors to the South, perhaps action will come sooner than later to provide easier credit to stem the outflow of capital to the strengthening US Dollar.
Lending has yet to demonstrate a solid expansion, but we suspect it’s coming soon. As we saw in the US it can take a couple years of recovery before optimism returns to the banking sector.
In the US as money growth rates slowed loan demand soared into double digits. While Europe is diffused with the rich North and relatively poor South, we expect modest money growth and higher loan demand similar to the US in 2015 assuming Euro leaders find a drug to cure their paralysis. A polarized US as never before appears to be more functional than 18 European countries cobbled together with very different economies and agendas.