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ECB analyses Foreign Demand for Euro Banknotes

Categories : Cash is universal
January 15, 2021
Tags : ECB, Euro, International Demand
The ECB paper ‘Foreign demand for euro banknotes’ provides a thorough analysis of the drivers for international demand and estimates that between 30 and 50% of the total value of banknotes circulate outside the euro zone.
Guillaume Lepecq

This post is also available in: Spanish

The report emphasises that international demand for banknotes is an important factor explaining the so-called cash paradox, i.e. the growing rift between increasing demand for cash and declining use of cash for transactional purposes.

Explaining Foreign Demand for Banknotes

“A multitude of factors explain foreign demand for euro banknotes.” say the authors. This includes inflation in the domestic country, political uncertainty, the degree of trust in financial institutions, opportunity costs versus other assets, relative attractiveness of holding other foreign currencies (as measured by the exchange rate), financial inclusion, education and income levels. “In general, if the domestic currency is not trusted to preserve its value (or has not been trusted in the past), a foreign currency that is strong, safe and backed by reliable and trusted governments represents a store-of-value opportunity in foreign countries.” conclude the authors.

Between 30% and 50% of the total Value of Euro Notes are Held Abroad

The study concludes that between 30% and 50% of the total value of euro notes in circulation were held outside the euro in December 2019. This represents roughly between €400 and €650 billion. The estimate is based on a combination of a direct approach, measuring net shipments of banknotes by financial institutions, and indirect approaches – including analysing banknote demand seasonality, the lifecycle of banknotes as well as the coin to banknote circulation ratio. It exceeds a previous 2018 ECB estimate of between 20 and 25%. As a point of comparison, according to the Federal Reserve Bank of Chicago, nearly 80% of $100 —and more than 60% of all US bills — were held overseas, up from roughly 40% in 2010.

In terms of geographical breakdown, the greatest demand comes from non-EU eastern Europe. Geographical proximity, common borders and historical ties are the main drivers  demand, which is associated with cross-border transactions, tourism and the search for safe haven assets during periods of economic or political stress. This is followed by Africa, where although the volumes are lower, tourism and remittances account are the main drivers of demand. In the Middle East, Asia and western non-EU countries, tourism is the key explanation. In the Americas, demand is negligible, due to the predominance of the dollar.

The research was undertaken before the pandemic. It will be interesting to see the impact of the health crisis on foreign demand for banknotes. Evidently, tourism has been negatively and dramatically impacted and there are signs that remittances have dropped as well. On the other hand, precautionary cash holdings grew in 2020 in an unprecedented way.


This post is also available in: Spanish