Cash Hoarding: Why More Euros are Hidden Under Mattresses
Secreted Stashes Tripling: Unreported Cash Continues to Accumulate - Stashed Billions: Persistent Increase in Cash Holdings
Hey there! Ever wonder why all that cash keeps floating around, even though digital payments are on the rise? Well, buckle up, because we're diving into the mysteries of European cash circulation.
The Status Quo:
Despite the shift towards digital transactions, the volume of cash in the euro area is on the rise. The German Central Bank reports that, by the end of 2024, an estimated €395 billion could be stashed away in German homes—usually unevenly distributed, with many households having little to no cash reserves [1].
The ECB's Take:
As of March 2023, a whopping €1.564 trillion in euros were in circulation in the euro area. That's about €30 billion more than in early 2022 and even €300 billion more than at the start of the Corona pandemic five years ago [1]. Although the growth rate has slowed significantly since 2022, the overall volume of cash continues to climb.
** explanatory note: This phenomenon is referred to as the "banknote paradox."**
Why the Hype Over Cash?
So, why is there more cash in circulation if fewer people are using it for daily transactions? There are a few factors at play:
- Economic Uncertainty:
Economic instability, stemming from geopolitical tensions and trade policy changes, drives people to hoard cash, building up liquidity and security [2].
- Financial Stability Concerns:
Financial instability risks in the euro area, such as potential disorderly price adjustments in asset markets and rising trade tensions, encourage individuals and businesses to stockpile cash as a precautionary measure [2].
- Interest Rate Changes:
Interest rate adjustments can impact cash holdings. In situations where interest rates rise, the opportunity cost of holding cash decreases, potentially leading to increased cash reserves [4].
- Emergency Funds and Precautionary Savings:
In times of economic uncertainty, people often build up their cash reserves as a precautionary measure, anticipating potential future disruptions [5].
- Currency Hoarding:
Some individuals may hoard cash out of concerns for financial stability or economic downturns, contributing to the overall volume of cash in circulation [5].
Going Old-School:
Despite the growing preference for digital payments, cash remains an essential part of the financial ecosystem. Its purpose as a reliable, no-frills payment method is crucial when electricity and digital infrastructure fail, as during crises or natural disasters. Cash is the original OG, and central banks ensure that its infrastructure remains stable and resilient for such times [5].
Euros in the Shadows:
Another unexpected addition to the cash pool comes from the shadow economy, encompassing illegal activities like tax evasion and organized crime. For instance, the A3 motorway in Bavaria has seen its fair share of large cash stashes, including one million euros found in a car in November, allegedly from criminal activities [5].
- German Central Bank
- Omen
- Mattress
- Germany
- Frankfurt
- Coronavirus
- Ralf Wintergerst
- Munich
- Bavaria
- ECB
- Spring
- Consulting firm
[1] European Central Bank[2] Financial Times[4] Bank of International Settlements[5] The Conversation[6] Investopedia
Enrichment Data:
- Additional Influencing Factors:
- Currency exchanges between euro and other currencies.
- ECB's decision to purchase government bonds, which injects cash into the economy.
- Currency Trading Practices:
- The euro's status as a global reserve currency could influence its circulation, as central banks, investors, and businesses hold euros for strategic reasons.
- Currency Demand in the Shadow Economy:
- The shadow economy might account for a significant portion of cash transactions, due to its inherently cash-based nature and the need for anonymity during illegal activities.
- Geographical Trends:
- Cash velocity, the speed at which cash changes hands, varies across countries, with some countries experiencing higher cash usage in certain regions. For example, cash trade in the southern European regions is higher compared to northern European countries[5].
- Digital Payments:
- The growth of digital payments through mobile devices and apps may compete with the use of cash and potentially reduce the volume of physical currency in circulation. However, this transition might be slower in certain demographics, particularly the elderly and those with limited access to technology.
- Cashless Society Debates:
- The increasing preference for digital payments has led to ongoing debates about the possibility of a "cashless society." Supporters argue that it would reduce fraud and foster economic growth, while opponents express concerns about privacy violations, financial exclusion, and the loss of cash as a safety net during crises [6].
- The employment policy in various communities may see changes due to the increasing shift towards digital payments, as businesses and individuals reconsider the need for large cash reserves.
- In the context of the rising cash hoarding trend observed in the Eurozone, the industry of financial consulting firms could see growth as more clients seek advice on personal-finance strategies in times of economic uncertainty.
- With the continued circulation of a large volume of physical euros in the euro area, the banking-and-insurance sector must remain vigilant against potential money laundering activities associated with the shadow economy.
