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ECB: The Covid-19 Pandemic has Amplified the Cash Paradox

Categories : Cash is a contingency and fall-back solution, Cash is also a store of value
April 1, 2021
Published in : Cash and Crises, Cash demand, ECB, Euro
A new ECB report concludes that the exceptional demand for banknotes during the pandemic is driven by an increase in precautionary holdings in times of uncertainty as well as by international demand, a phenomenon known as the cash paradox.
Guillaume Lepecq

Chair, CashEssentials

More Cash but Fewer Payments

By the end of 2020, the value of banknotes in circulation in the euro-area reached €1,435 billion, representing an annual yearly increase of €142 billion or 11%. This is the largest increase since the 2008 global financial crisis, as many people in Europe have responded to the coronavirus pandemic by storing cash. Storing cash in turbulent times isn’t unexpected (Rösl & Seitz), however the size of the phenomenon and the fact that it coincided with a period during which cash payments were significantly reduced due to lockdown policies as well as efforts from governments, banks and retailers to nudge consumers towards digital payments (Beretta & Neuberger) do make it exceptional.

The European Central Bank (ECB) paper defines the cash paradox as an increase in the demand for banknotes while the use of cash for retail transactions appears to decrease. The trend is not new and is not exclusive to Europe. The ECB surveys on consumer payments show that the volume of Point-of-Sale (POS) and person-to-person payments (P2P) declined from 79% in 2016 to 73% in 2019. Other countries, including Australia, India, Japan, the United Kingdom, or the United States, have observed similar trends during the pandemic.

Understanding Cash Usage

The anonymous nature of cash makes it difficult to measure what drives demand. The ECB has adopted three indirect approaches to estimate the share of banknotes used respectively for three key demand components: transactions; store of value, and international demand:

Each approach has its limitations, and the reliability of the results depends on the assumptions employed. The ECB Study on the payment attitudes of consumers in the euro area (SPACE) complements these models, which provides a payment diary for 2019 and another recent comprehensive study on the foreign demand for banknotes which concludes that between 30% and 50% of the value of euro banknotes was held abroad in 2019. This share has been increasing in recent years.

The Three Components of Cash Demand

The report concludes that the share of the value of banknotes in circulation held for transactions is estimated to be between 20% and 22% in 2019. The store-of-value component accounts for between 28% to 50% of total circulation, and the foreign demand for euro banknotes represents the remaining 30% to 50. The wide intervals of the estimates indicate a high uncertainty since the ways people actually use cash are not directly observable. These estimates do not factor in the pandemic’s impacts, i.e., the decline in transactional demand and increase in precautionary holdings. It will be important in the future to measure the long-term effects of the pandemic.

Euro Aeea CIC


Based on these figures, it is estimated that each euro-area adult is holding between €1,270 and €2,310. However, the ECB stresses that banks are holding more cash and estimates that banks have increased their cash reserves by €30 billion since the ECB deposit facility turned negative in 2014. This represents nonetheless only 7% of overall cash in circulation.

A Paradox that leads to other Paradoxes.

The ECB emphasises the importance of the cash paradox for central banks in terms of retail payment strategies, liquidity management, monetary policy, and the financial system’s resilience. “If cash is widely used as a safe haven during times of potential market turbulence, it may be mandatory to hold substantial strategic contingency stocks of banknotes to meet extraordinarily high demand during periods of crisis.” writes Alejandro Zamora-Pérez, author of the paper. But more broadly the cash paradox, also highlights other paradoxes for the cash community.

The first is that as we see more cash in circulation, the infrastructure to distribute, count, and sort cash is shrinking. Central banks have been closing cash centers, and banks have been closing branches and ATMs. The ECB SPACE study has highlighted the deterioration of the ease of access to cash as the level of satisfaction has dropped from 94% in 2016 to 84% in 2019.

The second paradox is that merchants’ acceptance of cash has been declining despite consumers holding more cash. According to the ECB IMPACT survey, almost 40% of respondents used less cash during the pandemic, and for 20%, this was due to merchants either not accepting cash or strongly advising not to use it.

The third paradox is that as the transactional use of cash is declining, numerous governments continue introducing policies to nudge consumers away from cash (Beretta & Neuberger). This includes, for instance, cash payment limitations present in seven euro-area countries, subsidies in favour of digital payments, obligations to accept digital payments, or limitations on legal tender.