War on Cash Puts ECB, EU on Collision Course with Germany

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Bundesbank: It’s a war on personal freedom and choice.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Relations between Germany, and the ECB have curdled in recent times over a key issue: the role of cash. Germans have a soft spot for physical lucre while the ECB and Europe’s executive branch, the European Commission, have openly expressed their desire to suppress, or even punish, its use.

For Germany’s central bank, the Bundesbank, the war on cash is a war on personal freedom and choice, in the name of saving a financial system and its absurd negative interest rates. Last year Bundesbank president Jens Weidmann warned that it would be “disastrous” if people started to believe cash would be abolished — an oblique reference to the risk of negative interest rates and the escalating war on cash triggering a run on cash.

In Germany, trust in Europe’s financial institutions is already at a historic low, with only one in three Germans saying they have confidence in the ECB. That was before ECB president Mario Draghi gave an infamous speech in May last year laying much of the blame for the Eurozone’s weak economy on Germans’ proclivity to save, rather than splash out on foreign imports or invest in the stock market.

Now, it’s the turn of the scientific advisory board of the Federal Ministry of Economics and Technology to have its say. In a new report, the board, which includes former ECB Chief Economist Otmar Issing, cautions that any attempt by government or central banks to enforce mandatory controls or withdraw larger denomination bills, as the ECB has pledged to do next year starting with the €500, could have very negative repercussions, in particular for the general public.

“Upper cash limits will hurt ordinary citizens, while the shadow economy and organized crime are likely to escape monitoring and alternative methods of payment,” it warns. The report highlights a number of potential negative consequences of suppressing or outlawing cash:

  • The potential for abuse or misuse of personal data: “The anonymity of payments (offered by cash) protects against misuse of… information.”
  • Less control over personal finance: “Whoever makes a payment in cash can see immediately how many coins and notes they have left in their purse or wallet.” This is much harder in a purely digital economy.
  • A threat to personal freedom and anonymity: The report also describes the potential “interference” in the freedom of ordinary citizens as “disproportionate.”




The European Commission would beg to disagree. It recently stated its intention to “explore the relevance of potential upper limits to cash payments”, with a view to implementing cross-regional measures in 2018. In the small-print accompanying the draft legislation, it breezily points out that privacy and anonymity do not constitute “fundamental” human rights:

prevent(ing) the anonymity that cash payments allow might be viewed as an infringement of the right to privacy enshrined in Article 7 of the EU Charter of Fundamental Rights. However, as complemented by article 52 of the Charter, limitations may be made subject to the principle of proportionality if they are necessary and genuinely meet objectives of general interest recognized by the Union or the need to protect the rights and freedoms of others.

Any attempt by the European Commission to set a mandatory continent-wide limit was bound to meet fierce resistance, in particular from countries that don’t have cash payment limits like Germany and Austria. The Bundesbank is also one of the world’s biggest manufacturers of physical cash. In total, €592 billion of the €1.1 trillion of banknotes in circulation at the end of 2016 started life at the Bundesbank.

Judging by its recent statements, the Bundesbank is determined to preserve this arrangement. Last year Carl-Ludwig Thiele, Bundesbank board member in charge of cash issues, delivered a barnstorming speech on the folly of suppressing cash in order to prevent people from escaping negative interest rates by fleeing into cash:

“This would, in my view, be the wrong response to the monetary policy challenges at the zero lower bound. Instead of financial repression it would make much more sense to discuss how economies could achieve stronger growth again through higher interest rates.”

The ECB hit back last month by threatening to make Germans pay for their love of physical money. If a national central bank such as the Bundesbank uses more than its allocation of physical cash, it should be made to pay interest on the overuse, at the ECB’s main refinancing rate, sources at the ECB said. For the moment, the issue is moot since the ECB rate is 0%.

But should the ECB, over time, raise benchmark interest rates to, say, 2%, it would result in an annual cost of €6.5 billion on the Bundesbank which would be paid to the national central banks of countries such as Spain and Portugal, who are underusing their cash allocation. In other words, the more physical cash a country’s citizens use, the higher the price for their respective central bank (and vice versa).

This could be a major problem in a country where almost 80% of all retail transactions are paid with cash. Even among millennials, two-thirds prefer paying in cash to electronic means of payment. Overall, the value of cash money used in Germany in 2016 rose by more than 7%.

It is not yet clear who will gain the upper hand in this conflict between Europe’s most powerful institution and Europe’s strongest economy and most powerful nation. But whatever the outcome, it’s likely to have major repercussions far beyond Germany’s borders. By Don Quijones.

The ECB is hatching a new plan, but at its own peril. Read…  Are Germans About to Be Made to Pay for Their Love of Cash?




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  11 comments for “War on Cash Puts ECB, EU on Collision Course with Germany

  1. Tom Kauser
    Apr 7, 2017 at 11:18 am

    Too much savings is a warning and not a salute ?

  2. OutLookingIn
    Apr 7, 2017 at 12:16 pm

    Having visited German friends many times over the years, I can attest to their love of cash, versus payment by “plastic”.
    You are frowned upon when attempting to pay by way of plastic debit or credit card. Only the “tourist traps” gladly accept your credit card as payment, or when paying for airline fare or at large hotels.
    The German love of handling cash instead of plastic, runs deep within the society. It is ingrained into each successive generation, with the shared memories of past financial follies. Privately held physical gold and silver are also very popular as wealth preserves.
    Any movement to ban the use of cash will fail in Germany.

    • Gustav Schuerman
      Apr 7, 2017 at 12:41 pm

      In Switzerland, many independent travel agents won’t accept credit cards or will add a hefty amount on top of the bill (some $50). So much for plastic / rubbish money.

      And why should someone use a debit card? It debits right away the amount from your account, so cash is just as good or probably better. Avoids keeping the vouchers and making a month end reconciliation.

      Also, here in Switzerland, cash withdrawal limits are already a reality. No cash withdrawals about SFr 100,000 are possible.

  3. Peter Mott
    Apr 7, 2017 at 1:01 pm

    The TARGET2 balances reflect the movement of euros around the eurozone. Unsurprisingly this movement has tended to be from the periphery to the core, in particular from Italy and Spain to Germany.

    Germany now has a “credit” of 800 billion euro while Spain and Italy each have a debit of about 300 billion.

    In principle interest is payable on these balances at the MRO rate. But this has been 0% since early 2016.

    Some think that Germany is “lending” money freely to Italy and Spain. This seems about right to me.

    Each euro country also has a ration of cash it can issue and if it goes beyond that then it must pay interest on the excess – again at the MRO rate.

    Germany has issued about excess cash (as DQ says) – about 250 billion I think. But the ECB cannot threaten Germany with paying interest because if they did Germany would get more from TARGET2 than it paid for the excess cash. Meanwhile Italy and Spain would be screwed.

  4. bkennedy
    Apr 7, 2017 at 1:46 pm

    Canada just cancelled it’s savings bonds program. One off the few remaining tamper proof savings mechanisms available to Canadians
    Wonder if this ties into the grand negative saving scheme projectile?
    Also Germans are smart for avoiding the stock market given lax oversight and blind eye to regulations (includes Canadas gappy set up)
    There have been far too many grand experiments that have ended in tears for the average person. Not the wizards creating them

  5. Apr 7, 2017 at 7:58 pm

    Isn’t it funny? The people who fought tooth and nail against transaction (Tobin) taxes now want negative interest banking!
    It must simply be who pays?

  6. R Davis
    Apr 7, 2017 at 9:34 pm

    The EU is 28 nations in a turmoil beyond belief.
    The refugee crisis is a constant pouring in of foreigners to the EU .. from you name it .. & there is no sign of an end soon.
    US General Wesley Clarke told us .. war with 7 countries in 5 years .. they are way behind scheduled.
    Lebanon is next on the list .. Somalia .. South Sudan 1.3 million people are displaced & on the move.
    Where are they all going .. in the direction of the European Union & Russia.
    Welfare money is exiting from the coffers & especially in Mutti Merkels turf .. like water gushing from a burst water hydrant.
    The question to wonder is .. do they have the sufficient amount of currency that is required to keep handing out .. or is it just too expensive to print up all that money.

    However .. if they pull the currency in favor of electronic transactions .. all hell will break loose .. as has happened in India & worse.
    Have you ever seen spooked cattle stampede ?

  7. R Davis
    Apr 7, 2017 at 9:38 pm

    p.s. Australia has many Mexican restaurants .. come to Australia & see .. stay a while .. stay forever.

  8. HIHO
    Apr 8, 2017 at 5:34 am

    “In Germany, trust in Europe’s financial institutions is already at a historic low”

    Hilarious, when you take into account that these very same institutions have helped Germany loot the rest of Europe by means of austerity, deindustralization, massive bail-outs for their zombie-banks, leverage to force privatizations and breaking legs if necessary (Berlusconi, Siriza etc..)

  9. d
    Apr 8, 2017 at 5:50 am

    This Germany ECB dispute will get louder between now and 2019 when draggi goes. It is partly about who replaces him and what school of thinking that person subscribes to.

    Another 10 year NIRP, loose monetary policy, buy up all the club med trash in sight type, will be very bad for the EZ.

    The power of the nasty little mafioso is already on the wane as EU institutions dont like executives making decisions on their way to and out the door.

    It would be nice to see italy and or greece explode in the nasty little Mafiosi’s face before he leaves. But it looks like he will get away with leaving them as ticking bomb’s on short fuses for his replacement.

  10. Hendrik1730
    Apr 13, 2017 at 3:26 pm

    A “ban on cash” and/or removal of high denomination money bills are very popular in countries which are highly corrupt. In Switserland e.g., there are still high-denomination bills and it’s one of the nations with a very low level of corruption or black market economy. India, on the other hand, is highly corrupt and they try now to eradicate high denomination bills – thereby crashing their economy. A ban on cash is a ban on freedom and privacy, and the “arguments” by governments in favor are plain bullshit. The Germans are right when they refuse a ban on cash.

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