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The Euro-Area and the Challenge of National Diversity

Categories : Cash connects people, Cash ensures competition among payment instruments
July 25, 2023
Tags : Cash demand, Euro Area, Forecasting
There is a degree of heterogeneity in cash demand between the largest member states of the euro area. While developments of cash in circulation in Italy, France and Germany broadly followed the pattern traced by the euro area, there are deviations caused by local circumstances.
Cash&Payment News

This post is also available in: Spanish

This article was first published in the June issue of Cash & Payment News and is republished with the editor’s authorisation.

A new paper about demand forecasting by the Banca d d’Italia (BdI) highlights some of the national factors that drive cash demand both on the supply and demand sides.

Italy: In Italy, during the sovereign debt crisis, a legislative intervention fixing the limit for cash payments at €1,000, in combination with new anti-money laundering controls, took circulation into negative growth rates in the period 2012-2016. At the same time, the cash-to-GDP ratio stopped increasing and remained broadly stable between 8% and 9% from 2012 to 2019.

France: In France, cash deposits made at Banque de France counters by banks and other cash handlers decreased by 250 million banknotes per year in the years 2014‑2016 and by 500 million banknotes per year in the years 2017‑2019, reducing the level of inflows from more than 7 billion banknotes in the early 2010s (peak) to about 4.6 billion in 2019.

The preference of French citizens for cashless means of payment is relatively high, and the digitalisation of the economy has continued, accentuated by the COVID-19 crisis. However, the decline in banknote flows did not prevent net issuance from growing at an average sustained pace of 7% per year (in value) from 2010‑2019. In terms of nominal GDP, cumulated net issuance (CNI) increased steadily to around 6% of GDP in 2019 compared with 2% in 2002.

Spain: In Spain, after the euro changeover, banknotes in circulation accounted for 7% of nominal GDP. CNI peaked at the end of 2006 and afterwards showed a continuous descent until the outbreak of the COVID-19 pandemic. It even turned negative at the end of the first quarter 2020 (0.2% of nominal GDP). At that time, the central bank was issuing fewer banknotes than were being returned.

This can be explained by the dynamics of foreign net cash inflows (e.g. cash flowing into Spain from abroad mainly due to tourism), which strongly increased in the last decade, providing a substantial supplementary source of banknotes.

Germany: The development of German-issued euro banknotes in circulation was similar to that of total euro banknotes in circulation, albeit with significantly higher annual growth rates. In 2019, a historical high of 83 million tourists visited the country, tourism reached a weight of 12.4% of GDP, and the typical tourism-related branches generated 2.7 million jobs (12.9% of total employment).

From January 2013 to December 2019, the average growth rate of German-issued banknotes in circulation was about 3.2 percentage points above the average annual growth rate of total euro banknotes. This growth rate differential can be attributed to the traditionally important role of foreign demand for German-issued banknotes.

According to an update of the estimate of foreign demand based on net shipments and travel data in Bartzsch et al. (2011), about 60% of German-issued euro banknotes on a value basis were held outside of Germany at the end of 2019 (40% outside the euro area and 20% in the rest of the euro area).

However, while the share of foreign demand in German-issued banknotes had been rising continuously from about 40% at the end of 2004 to 70% at the end of 2013, it has been declining. Correspondingly, the share of German domestic demand had been rising steadily from about 30% at the end of 2013 to about 40% at the end of 2019. This increase in the share of domestic demand is due to a significant rise in banknotes held as a domestic store of value. Their share in German-issued banknotes in circulation increased from 17% to 33% in the period under review, whereas the corresponding percentage of domestic transaction balances fell from 11% to about 8%.

This post is also available in: Spanish