Why is the €500 banknote about to disappear? Interview published in Frankfurter Allgemeine Sonntagszeitung
15.04.2019 | Johannes Beermann DE
The interview was conducted by Thomas Klemm.
Mr Beermann, the €500 note is being issued for the last time on 26 April. Does this farewell fill you with sadness?
No. After all, the €500 note will remain legal tender, so we can continue to use it to make payments or as a store of value. For that reason, it’s not a case of bidding farewell.
A total of 17 other euro area countries stopped issuing the €500 note at the end of January. Why did the Bundesbank and the Oesterreichische Nationalbank get an extension?
We issue by far the most cash of all euro area countries. Of all the €500 notes in circulation in the world at present, 70% were issued by the Deutsche Bundesbank. This is why the decision was made to give those that issue most €500 notes a bit more time. It’s quite a logistical challenge to replace a €500 note with five €100 notes or other denominations.
Is that because of the cost involved?
If I have to resort to smaller denominations, I need more banknote paper. Given that banknotes have to be delivered from the printers to the Bundesbank branches and to banks’ branches, and given that ATMs have to be stocked, the cash-in-transit firms need to make more journeys. That all costs more money.
The ECB felt that the €500 note should no longer be produced as a means of combatting the shadow economy and the financing of terrorism. Can that really work?
There is no empirical evidence of a link between a strong demand for cash and a flourishing shadow economy. We have just looked into this in a Bundesbank study. In fact, opinions even differ on the size of the shadow economy in Germany. Estimates vary widely, ranging between 2% and 17% of German economic output. These figures alone tell us that we ought to be very careful in how we interpret studies on the shadow economy, and that clear-cut findings are well-nigh impossible.
Twelve EU member states already have ceilings in place for cash payments – from €500 in Greece to €15,000 in Poland and Croatia. Is that not for a reason?
Following extensive studies and a public consultation, the European Commission last year came to the conclusion that a ceiling on cash payments would not lead to a significant decline in terrorism or in tax evasion. That’s why the Commission chose not to introduce a uniform cash ceiling.
Switzerland launched recently the new 1,000 Swiss franc banknote? Is this still contemporary?
Historical and political reasons always play a part in a country’s attitude to large denominations. In the United States, the highest denomination is the 100 dollar bill. And yet some ask if they shouldn’t lower it. The biggest note in China is worth the equivalent of €13. In Europe, we traditionally attach great importance to cash, which explains our fondness for high denominations. Switzerland is no exception in this respect. Why should we break with this European tradition? Cash is minted freedom. And the government will need to come up with good reasons for wanting to restrict someone’s freedom.
Are you saying there will never be a ceiling on cash in Germany?
I am sure we won’t be seeing that happen in the foreseeable future. As I said, it was after conducting extensive studies and surveys that the European Commission decided a year ago against imposing a ceiling on cash. No one should have to apologise for wanting to pay with large notes instead of with a debit or credit card.
Has the Bundesbank seen demand for €500 notes rise, the closer the last day of issue approaches?
Even at the beginning of 2016, when the first rumours arose that the issuance of €500 banknotes might be discontinued, demand stagnated. When it was announced in May 2016 that the €500 note would no longer be issued, demand actually dropped heavily before returning to normal. We can only speculate as to how demand will develop up to the last date of issue on 26 April. However, we are expecting demand to rise again slightly. First indications of this are already discernible.
Will the €500 banknote always be legal tender, or will it one day vanish or even cease to be valid?
It will remain legal tender. Even 20 years from now, the euro area central banks will still exchange a €500 banknote for other euro notes. The only difference is that when a €500 note is exchanged or deposited at one of the national central banks, it will in future be withdrawn from circulation.
What purpose has the €500 note actually served to date?
Our assumption is that the €500 note chiefly performs the function of a store of value – not only in Germany but worldwide. Two-thirds of the banknotes we issue are taken abroad, where they remain for a long time, meaning that the euro is recognised internationally as a stable currency and that many savers have confidence in it. You could say that if someone keeps €500 notes under their pillow, they won't have to sleep in an upright position – but that wouldn’t be the case with a substantial sum of money in smaller denominations. Moreover, the banknote can be conveniently placed in a safe and is easily hidden. The €500 note is probably used, above all, to make larger purchases such as buying a car. In the long term, the €200 note could well become the new €500 note, so that the number of them in our wallets will likely be as modest as is currently the case for the €500 note.
Very few average Germans have ever held a €500 note. Is that not a sign that it’s mainly criminals who use the banknote?
No. When we issue €500 notes we do not, of course, know what happens to them in every single case. But we do know that a lot of people put them away for a rainy day, or like to give them to a grandchild as a particularly striking wedding gift.
How often have you held a €500 note in your hand?
I, personally, have only ever had one in my wallet. Once, shortly before Christmas, I wanted to pick up €500 at the bank, expecting to receive a number of banknotes. I was very surprised when I received only one note.
There are those who fear that abolishing the €500 note would spell the beginning of the end of cash.
Such fears are unfounded. When you consider that three-quarters of point-of-sale payments are still made in cash, to abolish cash would be a significant intrusion in the German public’s personal lives. There will be no further changes. There is no question of the €200 or €100 banknote – or any other denomination – being abolished.
If there were no longer any cash, it would be easier for central banks to push through negative interest rates.
That is an academic debate. It isn’t the case that the central banks are discussing doing away with cash.
Don’t the Swedes provide a good example of how we can live our lives almost completely without cash? They even use smart phones to pay for a bar of chocolate.
Sweden is sparsely populated. They don’t have as many possibilities to deposit or withdraw cash as we do, and retailers have to transport cash to their bank over large distances. According to the Bundesbank’s most recent payment behaviour study, 88% of people say they do not want to be without cash. Cash is deeply anchored in our society.
The Bundesbank’s studies show that we Germans are making more and more card payments. Could it be that our love affair with cash isn’t as intense as people say?
In our payment behaviour studies we have repeatedly found that consumers only change their habits slowly when it comes to payments. Smaller payments, in particular, are mostly made in cash. Nor is Germany an exception in Europe in this respect. According to a survey by the ECB, cash payments are more commonplace in nine countries of the Eurosystem than in Germany. At the Bundesbank, of course, we take a neutral stance. We make sure cash and cashless payments run smoothly. You could call us the European highway for all manner of payment transactions; our job is to ensure that there are no potholes and that the money reaches its proper destination. But the Bundesbank does not stipulate what kind of vehicle should be used on the “payments highway”.
Are we likely to spend more when we pay by card? Or to put it another way: does cash have a disciplining effect?
Cash certainly does have a disciplining effect. As a young man I was careful to pay as rarely as possible by credit card, because otherwise I tended to buy more than I needed. With cash, on the other hand, I always know pretty well how much money I still have. In Bavaria, they have an expression which translates as “ripping up a banknote”. That’s when you pay with a note, receive smaller denominations and coins as change, and then watch your money disappearing from your wallet, little by little. This makes you more likely to rein in your spending.
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