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Pandemic cash hoarding creates ‘paradox’ for ECB

The coronavirus pandemic has created a “paradox” in how money is being used, according to the European Central Bank, after the amount of euro banknotes in circulation rose €156bn over the past year despite cash falling as a share of daily transactions.

The 12.2 per cent jump in physical euros in circulation mainly stemmed from EU households hoarding more cash in response to the uncertainty and disruption of the pandemic, a defensive reflex experienced in several earlier crises, the ECB said.

In many European countries, where cash is often the only way to pay in some shops and cafés, consumers responded to concern about the spread of coronavirus by withdrawing extra cash to keep in reserve after the pandemic struck just over a year ago.

This happened despite a big jump in online shopping and greater use of contactless card and smartphone payments, which were encouraged in some stores to reduce the risk of transmitting Covid-19 by handling cash. This was a big shift in a country like Germany, where three-quarters of transactions in shops are usually carried out using cash. 

“Recent payment surveys indicate that the share of cash transactions in the euro area has decreased,” the ECB said in a research bulletin. “This, together with ongoing digitalisation in retail payments, might have been expected to lead to a decrease in the demand for cash. However, this reduction in demand has not occurred.”

“This seemingly counterintuitive paradox can be explained by demand for banknotes as a store of value in the euro area . . . coupled with demand for euro banknotes outside the euro area.”

The value of euro banknotes in circulation rose from €1.28tn in February 2020 to €1.43tn in February 2021, growing at the fastest pace since the 2008 financial crisis. 

Four out of 10 people surveyed by the ECB last July said they used contactless payment cards more often since the pandemic started and a similar proportion said they used cash less often. The use of cash to pay for goods and services in shops had already fallen from 53 per cent of the value of such transactions in 2016 to 47 per cent in 2019.

“Reduced banknote flows in and out of Eurosystem central banks indicate that active circulation has decreased, suggesting a higher precautionary demand possibly due to increased uncertainty and reduced mobility,” the ECB said.

However, divergence is wide in cash usage between European countries. One in six Greek people surveyed by the ECB in 2019 said they used cash to pay their rent or mortgage, and a fifth of Italians said they paid their electricity bills in cash, while almost nobody it surveyed in France or the Netherlands used cash for either.

The total amount of cash reserves amounted to between €1,270 and €2,310 for every adult in the eurozone — although this includes money stored in vaults or safes at financial institutions and companies. The ECB said banks had increased their cash reserves in vaults by about €30bn since its deposit rate turned negative in 2014.

The ECB said: “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.”

Overall, the central bank said just over a fifth of banknotes in circulation were used for transactions, with the remainder used either as a store of value or to satisfy foreign demand for euros outside of the 19-country single currency bloc.


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