Eurozone money supply figures for February confirm a positive impact from the ECB’s liquidity injections but real money trends have yet to signal a recovery in economic activity.

An optimistic interpretation would highlight a turnaround in broad money M3 since the ECB’s first three-year LTRO in December – M3 rose by 0.5% in January and 0.8% in February following a 0.8% fall during the fourth quarter of last year. The pick-up mainly reflects a resumption of the sovereign carry trade: banks bought €40.5 billion of euro-denominated government bonds last month following €55.2 billion in January – see first chart. The large drawdown at the second three-year LTRO at the end of February suggests that purchases will remain strong near term.

Of the €95.8 billion of bond buying in January and February combined, Italian and Spanish banks accounted for €45.6 billion and €38.7 billion respectively.

Narrow money M1, however, is a better leading indicator of the economy than M3 and has shown less improvement, rising by 0.1% and 0.6% in January and February respectively. Both M1 and M3, moreover, remain below their level six months ago in inflation-adjusted terms – second chart. The six-month real M1 change turned heavily negative in early 2011, warning of the current recession (as it had the 2008-09 downturn, unlike real M3). The recent decline is smaller but still suggests economic contraction.

M1 comprises currency in circulation and overnight deposits. The ECB publishes a country breakdown of deposits but not currency. A 1.1% (not annualised) fall in Eurozone real M1 deposits in the six months to February conceals a respectable 1.8% rise in “core” economies (defined as Austria, Belgium, France, Germany, Luxembourg and the Netherlands) offset by a 5.6% plunge in the “periphery” (i.e. Greece, Ireland, Italy, Portugal and Spain), or 10.9% annualised – third chart. The peripheral rate of contraction has accelerated, not slowed, since the first three-year LTRO, suggesting a faster decline in output in mid 2012, allowing for the usual half-year lead.

The country decomposition confirms a continuing collapse of the Greek monetary system, with real M1 deposits down by 13.9% in the six months to February, or 25.9% annualised – fourth chart. (Real M3 deposit contraction is similar, at 13.6%.) The pace of decline in Ireland, Portugal and Italy is also alarming – 15.7%, 14.0% and 13.8% annualised respectively. Spanish real M1 deposits are falling more slowly than before the 2008-09 recession but this relative resilience may prove fleeting, with market pressures increasing again this month.

Peripheral monetary weakness, of course, partly reflects capital flight but this does not diminish its significance for economic prospects – collapsing confidence in banking systems signals extreme risk aversion that should be reflected in economic behaviour while money transferred abroad is less likely to be spent on domestic goods and services.