By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
“You got to be kidding, we can’t take that,” says the shop assistant as a man places a €500 bill in front of her for a €10 purchase. A waiter at a Michelin-star restaurant gives a similar response despite the fact that the total bill for the meal came to well over €100. Beginning to despair, the man then tries to pay part of his rent with the €500 note — something he has done several times before — but even the property agency refuses to take it.
“Things have changed,” says the property agent. “We now have to jump through hoops trying to explain to the bank where every single one of these bills comes from. It’s not worth our bother.”
This is happening all over Spain. The €500 banknote has lost much of its allure in Spain. Twelve years ago, the country was home to a staggering 26% of all the €500 notes that circulated in the Eurozone, then a 17-country currency bloc. As El País reported at the time, much of the money was being used in the thriving real estate sector, which is one of the main sources of black money as well as a popular conduit for laundering the proceeds of crime.
In 2006 Spain was in the midst of one of the most insane property bubbles of modern times and the €500 bill was everywhere. But now, 12 years later, the love affair is over.
In January the total value of all €500 euro banknotes in circulation in Spain was just €19 billion — the lowest level since 2003 and down from €33 billion In May 2016.
That was just before the ECB decided to stop producing €500 banknotes as of the end of 2018. The bill will continue to be accepted as legal tender, but the phasing out of the Eurozone’s highest denomination note has already had its desired effect: most consumers now associate it with criminal activities, such as corruption, drug trafficking, or the financing of terrorism. And as the real estate agency said in the example above, dealing with it is more trouble than it’s worth.
The decline in the use of the €500 note has in part been compensated by a commensurate increase in the use of other high denomination bills, particularly the €50 note. The number of €50 banknotes in circulation in January, at 1,027 million, is 4.8% higher than a year ago. According to Europa Press, since 2010 the overall use of €50 bills has been on the rise.
For the moment there’s little evidence that Spaniards are sharply reducing their use of cash in transactions, despite the best efforts of government, banks and credit card companies.
In the last couple of years, Spanish banks have pulled out all the stops to promote cashless payments, but to little avail. As in Germany and Italy, cash is still very much king at the point of sale (POS) in Spain, accounting for 71% of all retail transactions in 2016 — compared to 74% in 2011. In other European countries such as the UK, the Netherlands, Poland and Sweden the decline in cash usage has been far more dramatic.
However, Spain could see further limits on cash usage as part of proposed EU-wide cash restrictions that could come into effect as early as this year. But as we reported in February, sprouts of resistance are rising against the establishment’s escalating war on physical cash, not only from the public but also some senior central bankers.
In a speech hosted by the Bundesbank, Yves Mersch, a member of the ECB’s executive board, praised cash’s as legal tender, including for the privacy is provides, and heaped scorn on the argument that its anonymity only helps criminals. “No particular link can be established statistically between cash and criminal activities,” he said. “The focus must be on the fight against crime. Cash must not be made the scapegoat.”
In February a Bundesbank survey confirmed that attempts to turn the Eurozone into a cashless society would meet fierce resistance from Germans, with 88% against electronic means of payment. The Bundesbank is the Eurozone’s prime source of cash, accounting for about 60% of the currency area’s bank notes, and one of the world’s biggest issuers of notes and coins.
Despite the growing restrictions on the use of physical money, business is booming at the Bundesbank’s money printing division. Overall, demand for cash in Germany last year rose 7% — almost twice its nominal growth rate — to €635 billion. According to data cited by Mersch, in the last five years, the average annual growth rate of euro banknotes throughout the single currency region was 4.9% by value and 6.2% by piece.
In its three-yearly survey of the use of cash in Germany, the first since the Eurozone’s economic revival, the Bundesbank highlighted that over half the currency it produces ends up outside the Eurozone where it is hoarded by people to store their wealth in a liquid asset. In terms of global demand for bank notes, the euro was almost at par with the US dollar, said Carl Ludwig Thiele, who is in charge of the Bundesbank’s cash management. “This is an enormous vote of confidence in the currency,” he said.
In a delicious irony, any further attempts to undermine the role of physical money in the Eurozone could end up massively backfiring, by harming the euro’s position as a global cash hoard. The Bundesbank report should serve as a timely reminder that while the €500 bill’s days may be numbered, even in its erstwhile haven of Spain, the outcome of the War on Cash in the Eurozone is far from settled, especially given the extent of divisions that currently exist on the matter between senior members of the region’s political and monetary authorities. By Don Quijones.
In the War on Cash, a rare defense of physical money by an ECB Board Member. Read… “Cash Must Not Be Made the Scapegoat”
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.