Posted by WARREN MOSLER on August 26th, 2010
By Christian Vits
Aug. 26 (Bloomberg) — Loans to households and companies in Europe grew at the fastest pace in 13 months in July after the economic recovery gathered steam.
Loans to the private sector rose 0.9 percent from a year earlier after growing an annual 0.5 percent in June, the European Central Bank in Frankfurt said today. That’s the strongest increase since June 2009. M3 money supply, which the ECB uses as a gauge of future inflation, increased an annual 0.2 percent in July, the same rate recorded in the previous month.
Strengthening global demand helped Europe’s economy expand 1 percent in the second quarter, the fastest pace in four years.
Economic growth may slow as governments reduce spending to tackle bloated budget deficits and the global recovery shows signs of losing momentum. Orders for durable goods in the U.S.
increased less than forecast in July, a sign one of the few remaining bright spots in the economy is cooling, while China’s industrial output rose the least in 11 months.
This is what the Fed calls the ‘hand off’ with private sector demand increasing via credit expansion as growth causes public sector deficits to fall.
Growth can go on for many years until the public sector deficits get too small to provide the income and financial equity needed to support the increasing private sector debt needed to sustain GDP growth.
Much of Europe got to higher levels of govt deficit spending than the US, before market forces triggered the funding crisis. The ECB has now stepped in to facilitate funding and at the same time implement the widely advertised austerity measures.
With modest growth deficits will start trending down on their own, as revenues increase and transfer payments (including interest payments) moderate, as private sector credit expansion replaces public sector debt as described above.