Europe’s Demand for Cash Signals Crisis Hoarding, Not Economic Recovery
A two hundred euro bank note sits in a display case at the visitor centre at the European Central Bank. (Photographer: Alex Kraus/Bloomberg)

Europe’s Demand for Cash Signals Crisis Hoarding, Not Economic Recovery

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Companies are lapping up the cheap cash on offer in the euro area but no one should be fooled into thinking that will fuel a robust recovery from the coronavirus crisis, according to ING Groep NV.

Data on Friday showed the biggest leap in money supply growth in the currency bloc in more than a decade. In good times, that would signal businesses are drawing on loans to invest and consumers are out spending. Not this time.

“It would be wrong to see in the current figures a sign of economic strength,” ING economist Peter Vanden Houte wrote in a report. “On the contrary, because of the Covid-19 pandemic, firms have drawn on their committed credit lines to avoid any liquidity shortages in the coming months.”

Europe’s Demand for Cash Signals Crisis Hoarding, Not Economic Recovery

Vanden Houte notes that households, fearful of job losses, have also ramped up their savings. That’s reflected in a jump in the amount held in deposit accounts.

This means that fears the flood of money will lead to a surge in inflation are exaggerated, at least for now. Some economists say the massive monetary and fiscal stimulus at a time when supply of goods and services is curtailed will eventually push up prices even if economic growth doesn’t return.

“Don’t be fooled,” Vanden Houte wrote. “A big part of this increase is due to financial distress and precautionary savings. So for the time being, the information content of monetary aggregates is ambiguous to say the least, and reflects weakness rather than strength.”

©2020 Bloomberg L.P.

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