Pandemic hoarding creates ‘paradox’ for ECB

The coronavirus pandemic has created a ‘paradox’ in the way money is used, according to the European Central Bank, after the amount of euro banknotes in circulation increased by 156 billion euros during the year elapsed despite declining liquidity as a proportion of daily transactions.

The 12.2% increase in physical euros in circulation comes mainly from EU households accumulate more money in response to the uncertainty and disruption of the pandemic, a defensive reflex known in several previous crises, the ECB said.

In many European countries, where cash is often the only way to pay in some shops and cafes, consumers have responded to concerns about the spread of the coronavirus by withdrawing additional cash to keep it in reserve after the pandemic. which hit a little over a year ago.

This happened despite a sharp increase in online shopping and greater use of contactless card and smartphone payments, which were encouraged in some stores to cut back. the risk to transmit Covid-19 by handling cash. This was a big change in a country like Germany, where three quarters of in-store transactions are typically done in cash.

“Recent payments surveys indicate that the share of cash transactions in the euro area has declined,” the ECB said in a research bulletin. “This, combined with the ongoing digitalization of retail payments, could have resulted in a decrease in demand for liquidity. However, this reduction in demand did not take place. “

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

The value of euro banknotes in circulation increased from 1.28 billion euros in February 2020 to 1.43 billion euros in February 2021, increasing at the fastest rate since the financial crisis of 2008.

Four in ten people polled by the ECB last July said they have used contactless payment cards more often since the start of the pandemic and a similar proportion said they used cash less often. The use of cash to pay for goods and services in stores had already fallen from 53% of the value of these transactions in 2016 to 47% in 2019.

“The reduced flow of banknotes in and out of Eurosystem central banks indicates that active circulation has declined, suggesting higher precautionary demand, possibly due to increased uncertainty and reduced mobility,” said declared the ECB.

However, there is great divergence in the use of cash between European countries. One in six Greeks polled 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 no one interviewed in France or the Netherlands only used cash for one or the other. .

The total amount of cash reserves was between € 1,270 and € 2,310 for every adult in the euro area – although this includes money stored in safes or safes at financial institutions and institutions. companies. The ECB said banks had increased their cash reserves in safes by around € 30 billion since its deposit rate turned negative in 2014.

The ECB said: “While cash is used extensively as a safe haven during times of potential market turmoil, it may be mandatory to hold large strategic stocks of banknotes to meet extremely high demand during periods of time. crisis. “

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

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