Benoît Coeuré: Euro banknotes - a secure means of payment and a
symbol of Europe
Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank,
at the conference "Preparations for the launch of the second series of euro banknotes:
challenges and opportunities", organised by the European Central Bank and the Central
Bank of the Republic of Austria, Vienna, 22 April 2013.
* * *
I wish to thank Henk Esselink for his contribution to this speech. I remain solely responsible for the opinions
contained herein.
Ladies and Gentlemen,
I am very pleased to have been invited to speak at this conference, even though - because
of my responsibilities for Payments and Market Infrastructures - my focus is more on policies
concerned with cashless payments than with banknotes. I am, however, convinced that cash
and electronic payments do not compete with each other, but complement each other. The
existence of each is justified; the one needs the other.
As regards the role of cash in the Eurosystem, we should bear in mind that its importance for
central banks goes beyond the issuance of banknotes. From a macroeconomic point of view
we are especially interested in the share of euro cash in circulation, which is used for
domestic transactions in the euro area, since this is a key variable for measuring economic
activity and price developments. Furthermore, the demand for euro banknotes is one of the
drivers of liquidity required by the banks, which is a relevant indicator for our monetary policy
operations. I should add, though, that banknotes are currently less relevant for the liquidity
required by banks due to the non-standard measures taken by the Eurosystem. That said,
the profit made on banknotes in circulation, the so-called seigniorage, remains an important
source of income for the Eurosystem.
However, even though seigniorage is an important part of the total income of the
Eurosystem, the ECB has a neutral stance on the use of banknotes as opposed to other
means of payment. In other words, we neither promote nor prevent the use of cash, and
regard its use as a demand-driven process. But neutrality should not be mistaken for
indifference. On the contrary, cash is fiduciary money, which comes from the Latin word
"fiducia", meaning confidence or trust. This means that its value depends on whether it is
trusted as a means of exchange. This is a crucial point: maintaining trust is the fundamental
principle underlying all the Eurosystem's activities and decisions in the field of banknotes.
Fortunately, we can say that euro banknotes can be trusted if we look at the counterfeiting
levels in recent years. In 2012 just over half a million counterfeits were detected and
withdrawn - a very small proportion of the total average circulation of 14.9 billion banknotes.
By the way, the fact that euro banknotes can be trusted is not only evident from the statistics,
but also from everyday observation. In supermarkets, for example, you can see people
carefully checking strawberries that cost less than €3. But the same people don't seem to
worry about checking the €10 banknote they receive as change when they buy those
strawberries.
Also, the increase in euro banknote circulation itself shows that we have built and maintained
trust in the banknotes. At the end of last month, there were 15.2 billion banknotes in
circulation with a value of €896.4 billion; that's around 150% more than at the end of 2002.
This increase can, however, only be explained to a very small extent by the growth in the use
of cash for transaction purposes. We estimate that around one-third of the current circulation
value is used for transactions in the euro area. Another 25% is estimated to be in use outside
the euro area. This means that the remaining part - around 40% - is being used as store of
value in the euro area. The fact that around one-third of the circulation value is used for
transactions in the euro area means that any change in this proportion will only affect a
relatively small part of the banknote circulation. And even this relatively small share is only
affected to a limited extent by changes in payment behaviour. This is because a banknote in
circulation can be used for many transactions during a year. In other words, a 5% increase in
card transactions does not mean a 5% fall in banknote circulation.
This is probably one reason why the circulation of euro banknotes, even of the
denominations typically used for transactions, has not declined in the last ten years despite
the strong increase in the number and value of card transactions. Indeed, the average
number of card transactions in the euro area almost doubled between 2002 and 2011, from
36 transactions per inhabitant to 67. Also in terms of value, card payments saw a strong
increase, from €600 billion in 2002 to €1.1 trillion in 2011.1
Nevertheless, to judge by several
studies, we estimate that in the euro area 70-80% of the number of transactions and
50-60% of the value of all transactions at the point of sale are still made in cash.2
However, despite the predominance of cash in daily payments there are indications that
things are changing, although very gradually. One indication from surveys carried out by
different central banks is that the share of cash payments in retail payments appears to be
slowly diminishing. This decline seems to be somewhat more pronounced for the value than
for the number of cash payments, meaning that the average value of a cash payment is also
falling. A study on payments carried out by the ECB in eight euro area countries in 2008
revealed that cash is most often used for transactions below €20. On average 55% of the
respondents said they normally paid cash for typical daily purchases of between €30 and
€100. But on average 87% said they always or often used cash for purchases below €20.
This behaviour is reflected in the average value of a cash payment, which in 2011 was
around €20 in Germany and Austria, and only just over €12 in the Netherlands.3 In other
words, cash is still the most common form of daily retail payment, but largely and
increasingly because it is used for frequent small purchases.
However, this does not mean that cash is no longer used for high-value payments. Our 2008
survey showed that on average 20% of the interviewees in the eight countries said they used
cash always or almost always for purchases of between €200 and €1,000. 4% even said they
normally used cash for purchases above €10,000.
There is another function of banknotes, namely their function as store of value. Under normal
circumstances low interest rates result in low opportunity costs of holding cash, and
consequently in an increase in the demand for banknotes used for store of value purposes.
However, as we have seen in recent years, extraordinary circumstances can create an
additional demand for banknotes for store-of-value purposes. This became clear after the
collapse of Lehman Brothers, when in a period of only three weeks euro banknote circulation
increased by €35 billion. Also during the periods of high uncertainty in Greece banknote
demand increased strongly in that country, although a backflow of banknotes to the central
bank was also observed after the situation stabilised. Likewise, we saw a sharp increase in
the demand for cash in Cyprus in March and at the beginning of April. Let me also add that
the Eurosystem stood ready to accommodate the resulting precautionary demand for
banknotes to avoid further disruptions.
The situation in Cyprus has also reminded us that cash is both a means of payment and a
store of value of last resort. If banks are closed, cheques are no longer accepted and even
the payment cards of stressed banks are no longer trusted, so cash appears to be the only
way to settle a transaction immediately and without credit risk. At the same time, it has to be
said that while some retailers preferred cash, payment cards continued to be used for
payments at point-of-sale and for cash withdrawals. This reminds us also of the
interdependence of cash and payment cards. When banks are closed, ATMs are the only
source of cash. But in order to withdraw cash from ATMs people need a payment card, and
cards and ATM networks must be fully operational.
Now, how do all these developments influence the Eurosystem's perception of cash?
First, even though we do not expect a major changes any time soon, electronic payments will
continue to grow. But it will be a gradual process and it will lead to a reduced need for
banknotes for transaction purposes. And just for you to understand the possible implications:
if the payment pattern in the whole of the euro area was like that in the Netherlands, where
62% of the number and 37% of the value of all retail payments were made in cash in 2011,
the value of the cash withdrawals in the euro area would be only half the value of the current
cash withdrawals. As a result, the social cost of making cash payments will continue to rise
relative to the social cost of making an electronic payment. In one way or another, this will
put pressure on the cash sector to become more efficient.
Second, we feel that because of national differences in the use of cash, and differences in
geography and cultures, it is neither possible nor desirable to have one way of organising the
cash cycle in the euro area. We should, however, at least move in the same direction and
adopt a number of common rules and principles relating to the organisation of the cash cycle.
A good example is the ECB Recirculation Decision, which lays down the rules under which
third parties are allowed to re-circulate banknotes, and which applies to the whole of the euro
area. This should ensure that in the whole of the euro area the public can be certain that
banknotes provided by ATMs are genuine.
Third, while there can be no objections to a society with less cash, a cashless society is not
possible in the foreseeable future. Decisions and initiatives taken in various countries to limit
the value of cash payments by law are not incompatible with the legal tender status of euro
banknotes and coins, provided that other lawful means of payments are available.
Furthermore, limitations can be accepted if they are proportionate to the objectives pursued.
But although it is understandable that merchants wish to reduce the amounts of cash they
handle and hold for efficiency and security reasons, we feel that it is problematic that shops
will become cashless on a large scale. It would ignore the will of a large share of the
population, and it would also go against the principle of the legal tender status, and the
universal acceptance, of cash.
Fourth, as the events of 2008 and the more recent developments in some countries have
shown, there is a relationship between the demand for banknotes and public trust in the
banking sector. Although people clearly trust euro banknotes, it would be much better if they
did not feel the need to store banknotes because of concerns about the health of a bank or
the banking sector. That is why we are working hard to establish a European banking
supervisor, and why we should take all necessary measures as soon as possible to restore
confidence in the banking sector.
Now, let me come back to the main purpose of our event today: the launch of the
€5 banknote of the Europa series. The main reason for the new series is that the first euro
banknotes were issued over 11 years ago and the technology in those banknotes is more
than 15 years old. Even though the number of counterfeits is relatively low, it is important to
maintain trust in euro banknotes and to stay ahead of developments. So on 2 May we are
launching the €5 banknote as the first denomination of the new series. The other
denominations will follow in ascending order in the next few years.
Apart from the more vivid colour of the €5 banknotes, the most visible change in the
banknotes is probably the emerald number on the front and the portrait of Europa in both the
watermark and the hologram. However, maybe the most important changes are those which
are invisible to the human eye. We have not only applied a special coating, which will make
the banknotes more durable and should extend their life, but have also incorporated several
new or enhanced security features which are used by banknote authenticity devices and
banknote handling machines.
In most countries the €5 banknotes will be mainly brought into circulation via bank counters
and the cash ordered as change by retailers. As a result, the new €5 banknotes will gradually
arrive in everyone's wallets. Only in some countries will €5 banknotes also be issued via
ATMs, but even in these countries banks seem to be reducing the availability of
€5 banknotes in ATMs. We don't see this as a good development; banks should consider
issuing more €5 banknotes via ATMs. It would be convenient both for the public, which tends
to pay cash for small-ticket items, and for retailers, which would need less change.
Additionally, it would also mean that the overall quality of the €5 banknotes in circulation
would be higher in many countries.
In the presentations today and tomorrow you will learn more about the design and security
features of the new euro banknotes and about the preparations for the introduction of the
Europa series by central banks and the various stakeholders in the cash cycle. These
presentations will make clear that the design, development and printing of a new banknote
represent only half the work behind the issuance of a new series. The other half has to be
done by the various stakeholders in the cash cycle.
When introducing a new banknote it is essential to inform the public about its security
features and to encourage them to look at the banknotes. This is not easy for a product
which the public has been using every day for the past 11 years. So, the public information
campaign which we have launched aims to make people aware of the Europa series and its
security features. In this respect, it is encouraging that after the unveiling of the new €5 on
10 January 2013 a public opinion survey showed that no fewer than 51% of people in the
euro area were aware of the new series. This probably reflects the spontaneous interest that
people and the media have in banknotes. But this survey also indicated that more efforts are
needed to ensure the public not only knows about the new banknote series but also about
the security features.
I have talked about euro banknotes as a means of payment and a store of value, but would
like to conclude by mentioning the third Aristotelian function of money: as a unit of account4.
Over the years the euro banknotes, as our unit of account, have become an important
symbol of European integration. Just as a euro banknote is worth the same everywhere in
the euro area, one euro of commercial money should be worth everywhere the same. The
Single Supervisory Mechanism will contribute to restore the singleness of euro area banks'
liabilities provided that it is complemented by a single mechanism, with a common financial
backstop, to wind down failed banks. The ECB will not let trust in the euro as a standard of
value be undermined by fears of a euro break-up and by financial fragmentation, and will
continue to act appropriately within the limits of its mandate. Thank you for your attention.