Money supply

The money supply measures how much money is available in total in an economy. The European Central Bank (ECB) distinguishes several definitions.

The money supply aggregates:

M0 (monetary base / central bank money):

• Cash in circulation + banks' reserves at the ECB
• Only the ECB can create M0 ("printing money")

M1 (narrow money):

• Cash + overnight deposits (current account balances)
• The money you can access IMMEDIATELY
• Eurozone M1 (2024): approx. 10 trillion euros

M2:

• M1 + deposits with a maturity of up to 2 years + deposits redeemable at up to 3 months' notice
• Incl. savings books, fixed-term deposits

M3 (broad money):

• M2 + money market funds + debt securities up to 2 years + repurchase agreements
• The ECB mainly looks at M3 for its monetary policy
• Eurozone M3 (2024): approx. 16 trillion euros

Why the money supply matters:

• Too much money + too few goods = inflation (quantity theory of money)
• During the coronavirus/energy crisis: the ECB expanded M3 massively → inflation in 2022/2023
• Too little money = deflation and recession

Creation of book money:

90% of money isn't printed by the ECB but created by commercial banks through lending ("book money creation"). When a bank grants a loan, new money is created – practically out of nothing.