ECB invokes banknote paradox to explain cash in the age of contactless

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

While banknotes and coins represent a declining share of daily transactions in the currency bloc, the value of cash in circulation has nearly doubled over the past decade, the ECB said in its economic bulletin.

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

More than 1,400 billion euros ($ 1,700 billion) in banknotes were in circulation at the end of 2020, up 11% from the previous year. Yet the evidence suggests that only about a fifth of this amount is used for transactions within the currency area.

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

The rest, perhaps up to 50% in value, is physically stored by households, businesses and banks. A survey showed that a third of households in the euro area kept cash reserves at home in 2019 – mostly small amounts but in some cases more than 10,000 euros.

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

“As with other crises, the increase in demand for liquidity has been driven by precautionary reasons, although this demand comes mainly from within the euro area,” the report said. “More evidence will be needed in the future to assess how the cash will be used after the pandemic is over.”

This story was posted from an agency feed with no text editing. Only the title has been changed.

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