The twist and turns of economic activity so far in 2026 have impacted the Euro area but let me start with something that feels like the tide coming in.
Put like that, it sounds like we are introducing the digital euro as a defensive measure against something or someone. That isn’t really correct.
That is from Pierre Ci[poloni of the ECB being interviewed a week ago. It fits my never believe anything until it is officially denied mantra and then we got yet another attack on cash.
The ability to use central bank money for retail transactions is declining rapidly: in 2024 cash accounted for 24% of day-to-day transactions in value terms, down from 40% in 2019.
Actually the amount of cash has been rising but that is not convenient for their argument. Those who followed the time when they stopped issuance of 500 Euro notes will recall the attack on it then. The problem in this arena is that by simply providing a 0% interest-rate cash blocks their plan for even lower negative interest-rates in the next major recession. Various speeches have hinted at -3%.
Also he is forced to confess to another failure in Europe.
We’ve been calling on the private sector to come up with a pan-European solution for many years now.
The answer to the failure is of course more of the same.
But it will also mean that there will be a single, public standard accepted by all European merchants.
They hate anything where there has been innovation and invention.
Currently, when a payment service provider (a bank or fintech firm) provides services to a merchant, the merchant has to sign up to its standards. As a result, the more standards there are, the more fragmented things become.
This completely ignores the reality that as time passes the system usually moves to a general standard like say VHS for video recorders back in the day. Or how the railways developed. But instead the Euro area has created a zombie banking structure which behaves like this.
One of the problems we are looking to solve with the digital euro is the lack of a viable European payment method for e-commerce.
We are back in a way to the Draghi Review where we see again someone with no intention of encouraging innovation. Also let me remind you of the way that people like this claimed that financial crime was due to cash whereas I argued that the banks are the source of much of it.
BREAKING – Raid at Deutsche Bank: On suspicion of money laundering, the judiciary is searching the buildings of Germany’s largest financial institution in Frankfurt and Berlin. Unknown employees are under investigation, according to the Frankfurt prosecutor’s office. ( DW Politics)
Germany
Pierre was in good form and also gave his opinion on the economy.
GDP has been resilient and we’re expecting figures that may even outperform the forecasts.
Therefore it was hard not to have a wry smile as I noted this earlier.
The German government has lowered its 2026 growth forecast to 1%, conceding that efforts to kickstart Europe’s beleaguered top economy with vast public spending were moving more slowly than hoped.
“The expected stimulus from economic and fiscal policy measures did not materialize as quickly or to the extent that we had assumed,” Economy Minister Katherina Reiche (CDU) said on Wednesday.
Back in October, the government had predicted 1.3% growth (DW News)
The news does fit with my rule for such forecasts where you declare a better one then keep edging it lower when attention is elsewhere. In fact that theme is about to have another success if this from Oliver Rakau is correct.
Could German Q1 GDP growth disappoint, even be -ve despite fiscal support etc? Early days in Q1 but some nuggets in ifo data point to that risk. A sharp drop in construction capacity utilisation in Jan on the back of unusually adverse weather could easily drag 0.2-0.4ppts on GDP.
Troubling times especially when the official view is that the German economy is about to emerge into the sunlight after a dark period. Plus there does seem to be a bit of a general issue with construction in Europe which has been in trouble for a while now.
The HCOB Eurozone Construction PMI® Total Activity Index — a seasonally adjusted index tracking monthly changes in total industry activity — rose to 47.4 in December, up from 45.4 in November, increasing for the second month running to signal a softer reduction in construction activity that was the weakest since February 2023.
Economics 101 would have suggested that the interest-rate cuts to 2% should have boosted this area. But apparently not so far. Also whilst we have left the European Union the UK has problems in this sector as well.
Plus Economics 101 has another issue and it is with something rather old fashioned as in the Keynesian growth multiplier. With the new German enthusiasm for fiscal policy it should be generating some growth and that often starts in the construction sector.
Money Supply
Sometimes different parts of the news flow contradict each other but not in this instance. This morning’s ECB money supply release tells us this.
Annual growth rate of broad monetary aggregate M3 decreased to 2.8% in December 2025 from 3.0% in November.
So if inflation is on target at 2% then there will be little economic growth at around 0.8%. That is not for the here and now as it is a predictor for 18/24 months ahead. But in a way that is worse. Also the more timely indicator narrow money did this.
Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 4.7% in December from 5.0% in November.
Returning to broad money we see that there has been a decline in the annual growth rate since the spring and early summer of last year when we saw several 3.9% prints. So whilst end of year numbers can be erratic we see that there has been a recent downwards trend. This is less true of M1 but maybe it too is now on the slide after the recent peak at 5.2% in October 2025.
The Euro exchange-rate
As I pointed out in a reply to a comment yesterday central bankers do their best to avoid mentioning currency levels as it makes them a hostage to fortune.
Jan 28 (Reuters) – The European Central Bank may need to consider another interest rate cut if further gains in the euro begin to weigh on the bank’s inflation outlook, Austrian central bank governor Martin Kocher told the Financial Times.Recent gains against the dollar were “modest” and did not require a response, Kocher said in an interview published on Wednesday, warning that sharper appreciation could lower inflation projections and force the ECB to act.
Comment
Things may well be shifting here as the signal ECB President Christine Lagarde has frequently mentioned is more positive.
“The recovery still looks rather feeble. In manufacturing, the headline PMI continues to signal weakness, while growth in services activity is somewhat more moderate than the month before. Overall economic growth remains unchanged. Looking ahead, the low growth in new orders is certainly no game changer. Instead, the start into the new year points to more of the same in the months to come.”
By that I mean that it talks of a recovery. But it would not take much for interest-rate cuts to come back onto the agenda.