ECB Invokes Banknote Paradox to Explain Cash in Contactless Age

Cash is alive and thriving in the euro zone despite the rise of debit cards and contactless payment, and the pandemic has even accelerated that trend, according to the European Central Bank.

While notes and coins account for a shrinking share of daily transactions in the currency bloc, the value of cash in circulation almost doubled in the last decade, the ECB said in its economic bulletin.

ECB Invokes Banknote Paradox to Explain Cash in Contactless Age

Once dubbed the “paradox of banknotes” by Bank of England Governor Andrew Bailey, the phenomenon is mainly down to two reasons: demand for the currency outside the bloc, and Europeans hoarding cash to store their wealth, the ECB researchers wrote.

More than 1.4 trillion euros ($1.7 trillion) of banknotes were circulating at the end of 2020, up 11% from a year earlier. Yet the evidence suggests that only about a fifth of that is used for transactions within the currency area.

Studies have shown that 30-50% by value is held outside the bloc, such as in developing economies with underdeveloped payment infrastructure and a lack of credible savings options.

The rest, maybe as much as 50% by value, is physically stored by households, companies and banks. One survey showed that a third of euro-area households kept cash reserves at home in 2019 -- mostly small amounts but in some cases over 10,000 euros.

The growth of cash intensified during the coronavirus crisis, at a pace matched only by the aftermath of the collapse of Lehman Brothers Holdings Inc. in 2008.

“As with other crises, the increase in cash demand has been driven by precautionary motives, although this demand has come mainly from inside the euro area,” the report showed. “Further evidence will be needed in the future to assess how cash will be used once the pandemic is over.”

©2021 Bloomberg L.P.

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