The rise in the terror threat has led to fresh calls to scrap the €500 note, long viewed as an easy means to finance criminal activity.
In an era of negative interest rates, there are other reasons why high denomination notes should be outlawed. Yet doing so will stoke divisions within the eurozone.
The €500 bills, produced at printers in Germany, Luxembourg and Austria, make up just 3.2 per cent of all banknotes. But their value amounts to almost 30 per cent of the entire stock of cash, despite many Europeans never having seen the purple note.
Their rarity has raised constant suspicion of nefarious activity: the European Commission’s probe into the links between €500 and criminality is just the latest attempt to get to the bottom of the matter.
Mario Draghi, president of the European Central Bank, which controls production of the note, said last week his institution was determined not to make the profits it makes from the production of high-value banknotes “a comfort for criminals”.
As with much of the workings of the single currency, the €500 bills are a relic from the pre-monetary union era. The 1,000 D-Mark note was worth €511.29. At the discussions that led to the creation of the euro banknotes, officials from Germany and other countries with high-denomination notes wanted a €500 bill despite concerns of criminal misuse.
For the ECB, the time to scrap it has never been better.
Of euro banknotes are €500 bills
In 2014 the eurozone’s monetary guardian became the first major central bank to cut rates below zero. The deposit rate imposed on lenders’ reserves parked at the eurozone’s central banks is now minus 0.3 per cent. Another cut is expected in early March.
Some private banks now want to pass on negative rates — in effect a charge — to private depositors. Charges above 0.5 per cent are deemed likely to spark a shift from electronic money to hoarded cash.
Of value of entire euro cash stock made up by €500 bills
It would cost just €60 to store €3m in €500 notes at in a safe-deposit box at Deutsche Bank for a year. To store the same amount in €50 bills — in a bigger box — would cost €380.
The difference might sound insignificant to someone with that much wealth. But scrapping the €500 note would reinforce the message there are costs to hoarding cash. It would encourage people to spend more. It could also persuade them to hold their wealth in another currency, which would help to weaken the euro and raise inflation on the back of more expensive imported goods.
It would also send a strong signal about the ECB’s intentions: issuing a banknote that is used largely as a store of value and hardly ever to buy things is at odds with the ECB’s efforts to spur economic recovery.
But scrapping the notes would face opposition in more prosperous parts of the eurozone such as Germany, where the ECB has faced a backlash over its rate cuts.
Jens Weidmann, Bundesbank president, said last week it would be “fatal if citizens got the impression that they are dispossessed of cash”. There are good reasons to think like him.
During the early stages of the financial crisis, demand for €500 bills surged as savers took money out of banks considered unsafe. The apparently fixed value and tactility of banknotes offered further reassurance. Eight years on, it still does.
Monday’s Bild, Germany’s highest circulation newspaper, contained a letter for readers to send to finance minister Wolfgang Schäuble in protest at his recent plans to limit cash purchases to €5,000.
“Cash means liberty,” the letter said. “Cash means independence from banks, technology and fees.”
The euro is also the ultimate symbol of integration. So much so, euro banknotes feature a collection of bridges. The debt crisis has already undermined those links. Scrapping the €500 bill, and arousing German suspicions about monetary union, would weaken them even more.
Get alerts on European Central Bank when a new story is published