On January 1, 2007, Europe celebrates the fifth anniversary of the launch of euro notes and coins by welcoming a thirteenth member of the eurozone – Slovenia, the tiny former Yugoslav republic. But the eurozone’s geographical expansion is modest in comparison with the rapid growth in euro notes in circulation within the region and beyond.

Earlier this month, the value of euro notes pushed through the €600bn (£402bn; $787bn) level – roughly double the value of the then-national currencies in circulation at the end of 2001. The signs are that in December the currency came of age by overtaking the US dollar in terms of the value of notes in circulation. The figures used for the comparison by the Financial Times include notes held in the vaults of commercial banks but exclude reserves of notes held by central banks.

Slovenia’s small size – its population is just 2m – means that the impact of its entry will be hard to separate from the usual spike in demand for cash around Christmas and New Year, according to Antti Heinonen, head of the European central bank’s bank notes directorate. So what has driven rapid growth in euro notes?

After the 2002 launch, the rate of increase slowed, but has remained at or above 10 per cent a year. The exact reasons are unclear; even central banks do not know where their notes are or for what purposes they are used.

Mr Heinonen suggests several explanations. Within the eurozone, citizens may still be adjusting to the new currency. In terms of population, the eurozone, with 315m inhabitants, is larger than the US. Low interest and inflation rates have “reduced the opportunity cost of holding cash, rather than putting your money in a bank account”, he says.

Eurozone citizens anyway like to hoard some cash, perhaps more than their US counterparts, especially if they have difficulty getting to an automated cash dispenser. Electronic payment systems remain far from universal.

Robust eurozone growth, which has matched that in the US in recent quarters, could have added to demand.

Other clues come from the popularity of different euro notes. In volume terms, €500 notes have seen the fastest growth; their number in circulation was rising at an annual rate of almost 14 per cent in November. The volume of low-denomination dollar notes means that in terms of individual notes in circulation, the dollar leads the euro, and the dollar has retained its title as “cash most used outside of its borders”, says Mr Heinonen.

The popularity of high-value euro notes might result from their use by criminals, although the ECB does not put too much weight on such factors. “Clearly cash is used by criminals because it is an anonymous instrument,” adds Mr Heinonen. “But to say that it would be more difficult to commit a crime if we didn’t have high denomination notes would be to confuse cause and effect. If we didn’t have the higher denominations, criminals would use the lower denominations – or other global currencies, such as the US dollar or Swiss franc.”

The overseas demand for euro notes is clearer to see. Tourists travelling outside the eurozone are likely to have taken euro notes with them and not brought so many back. The notes have also become popular in European Union member states that hope to one day to join the eurozone. Kosovo and Montenegro have adopted the euro as their national currency, even though they are not yet EU members. In countries such as Russia and beyond, euros have gained acceptance.

And at least when it comes to overseas use, the ECB has some indications about the scale of demand. Using statistics on the net the value of euros shipped by financial institutions, the ECB estimates that the stock held outside the eurozone must be worth at least €55bn, and that is almost certainly too low an estimate given the net outflow accounted for by tourists.

The ECB estimates that between 10 and 20 per cent of the €600bn euro notes in circulation are held outside the eurozone.

Copyright The Financial Times Limited 2018. All rights reserved.

Comments have not been enabled for this article.