ECB analyses Foreign Demand for Euro Banknotes
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The report emphasises that international demand for banknotes is an important factor explaining the so-called cashMoney in physical form such as banknotes and coins. More 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 euroThe name of the European single currency adopted by the European Council at the meeting held in Madrid on 15-16 December 1995. See ECU. More 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 rateThe rate at which one currency will be exchanged for another. More), financial inclusionA process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products. While it is recognised that not all individuals need or want financial services, the goal of financial inclusion is to remove all barriers, both supply side and demand side. Supply side barriers stem from financial institutions themselves. They often indicate poor financial infrastructure, and include lack of ne... More, education and income levels. “In general, if the domestic currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More is not trusted to preserve its value (or has not been trusted in the past), a foreign currency that is strong, safeSecure container for storing money and valuables, with high resistance to breaking and entering. More 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 banknoteA banknote (or ‘bill’ as it is often referred to in the US) is a type of negotiable promissory note, issued by a bank or other licensed authority, payable to the bearer on demand. More demand seasonality, the lifecycle of banknotes as well as the coinA coin is a small, flat, round piece of metal alloy (or combination of metals) used primarily as legal tender. Issued by government, they are standardised in weight and composition and are produced at ‘mints’. More 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 remittancesMoney sent home from emigrants working abroad. More 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 dollarMonetary unit of the United States of America, and a number of other countries e.g. Australia, Canada and New Zealand. More.
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.
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