ECB and Cash

The End of €500 Bills

500Banknotes-Reuters
German consumers are more concerned than most about bidding the bills goodbye.
  • Why it matters

    Why it matters

    Removing the €500 note from circulation could help combat money laundering, but some Germans argue it infringes on their rights.

  • Facts

    Facts

    • In terms of value, €500 banknotes make up about one third of notes in circulation in the euro zone.
    • The European Central Bank is considering either printing new smaller notes to replace €500s, or to stop printing the high-valued notes and let them to die out over time.
    • The central banks of Germany, Austria and Luxembourg have opposed the ECB’s decision to start the process for removing  €500 notes from circulation.
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  • Audio

    Audio

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The battle over the future of cash in Europe took another major turn on Monday.

The governing council of the European Central Bank has officially started a process to abolish €500 bills, Handelsblatt learned Monday.

Mario Draghi, the ECB’s president, confirmed later Monday afternoon that the central bank was “considering action on that front” during his quarterly testimony before the European Parliament.

The ECB’s top decision-making body recently adopted a declaration of intent on this topic, insiders told Handelsblatt, which is a strong indicator of how the central bank is likely to decide on the matter in several months’ time.

From the central bank’s point of view, ending circulation of the banknotes is a way to fight money laundering. The bill is used primarily for illegal business, according to corruption and crime experts. Many retailers in Europe no longer accept the purple bills, the highest cash note available in the euro zone.

But it’s an idea that could prove unpopular in Europe’s largest economy, Germany, where many consumers still rely on cash even for larger purchases. Just 18 percent of all transactions in Germany were completed with cards – debit or credit – in 2014, less than any other E.U. country. The United States abolished the $500 note in 1969.

“It has nothing to do with reducing cash. That is important to keep in mind.”

Mario Draghi, ECB President

Given that background, the ECB’s plans are opposed by the Bundesbank in Germany, along with the Austrian and Luxembourg central banks, according to a source familiar with the discussions.

That doesn’t necessarily matter: A simple majority in the council would be sufficient to stop issuing the €500 notes.

The possibility that €500 notes could be abolished is also causing sleepless nights in another country – Greece. Rather than put their money in banks, many households here have simply stocked up on cash at home. Many also still use cash to avoid business deals being flagged to tax authorities – Greece’s black market is estimated at about 25 percent of overall economic output.

In 2015 alone, deposits at Greek banks fell to €123 billion from €160 billion in 2014, as the Mediterranean country was very nearly forced out of the euro altogether and capital controls were introduced. Part of the money withdrawn was deposited with foreign banks, but bank experts estimate that at least €20 billion is kept by Greek households in safety-deposit boxes, under floorboards or other hiding places.

Mr. Draghi on Monday sought to defend the ECB’s decision to start the process, stressing that it amounted to an effort to fight crime rather than to reduce the availability of cash in the economy.

“The €500 note is being viewed as increasingly an instrument for illegal activities,” he told European parliamentarians. “It’s in this context that we are considering action on that front…It has nothing to do with reducing cash. That is important to keep in mind.”

“Of course, we have to do it very carefully and in the best possible way,” he added.

 

078 ECB-01 Mario Draghi WTB 2014 resume

 

The council has already asked its committee on banknotes to look into the technicalities of withdrawing the bills from circulation, according to sources. The committee now has two to three months to complete this process before the central bank reaches a final decision.

Key questions include how long the bill will continue to be accepted once circulation is halted. In terms of value, €500 notes currently make up about one third of all notes in circulation.

To replace these notes – without reducing the flow of cash – would involve printing between €3 billion and €6 billion in additional notes, depending on which notes are printed instead. Given such large amounts, a short transition period could prove problematic.

Another solution the bank might consider is to phase out the banknotes over time, simply by halting the production of new €500 notes. As the old notes become worn and are eventually withdrawn, the volume of the bills would be reduced.

The ECB is already in the process of introducing a new series of banknotes – it has revamped the €5 €10, €20 notes – and removing old notes from circulation. The idea to date has been a step-by-step revamp of larger notes as well, including the €500 note. This plan could now be halted – at least when it comes to the highest cash note available.

Politicians in Germany have been divided over whether higher cash notes should be abandoned, as well as over whether there should be an overall cap on cash payments for goods in Germany.

The Social Democrats, the junior partner in Chancellor Angela Merkel’s coalition government, last month said they were in favor of abolishing the €500 note and called for an upper limit of €5,000 (around $5,400) for cash payments.

Ms. Merkel’s CDU party has been cool to the proposal. Some parliamentarians have argued that restrictions on cash amount to an infringement of people’s individual freedoms.

 

Daniel Schäfer is Handelsblatt’s finance section chief. Jan Mallien is Handelsblatt’s monetary policy correspondent covering the European Central Bank in Frankfurt. Christopher Cermak is an editor covering finance and economics for Handelsblatt Global Edition in Berlin. Gerd Höhler of Handelsblatt also contributed to this story. To contact the authors: d.schaefer@handelsblatt.com, mallien@handelsblatt.com and cermak@handelsblatt.com 

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