Stock market losses, sharp swings in asset prices and political upheaval largely explain why continental Europeans stockpiled so much cash from 2001 to 2004, according to a new Bundesbank study.
Money supply surged in the euro zone from 2001 after the dot.com stock market collapse. Despite recovery in financial markets, preference for cash has remained high, causing central bankers to worry that high liquidity could be a future driver of inflationary pressures.
The European Central Bank (ECB) has said that risk aversion of households and businesses after steep stock market losses could explain why portfolio shifts out of cash and into higher-earning assets has not occurred.
In the euro zone M3 - the measure of money supply - increased at an 8 per cent rate in 2001, almost double the 4.1 per cent rate seen a year earlier and way above the ECB's 4.5 per cent reference rate for annual M3 growth.
Money supply growth has remained very strong ever since. M3 expanded at a 6.9 per cent annual rate in 2002, 7.1 per cent in 2003 and 6.6 per cent in 2004. The latest data for June showed a further pickup to a 7.5 per cent year-over-year growth.