ECB Decrees Slow Death of 500-Euro Note in Crime Crackdownby
Policy makers will stop producing the notes from end of 2018
500-euro bill will remain legal tender for unlimited period
The European Central Bank will discontinue production of the 500-euro ($572) banknote in a move that risks tensions with euro-area citizens worried the institution is encroaching on their freedoms.
Citing “concerns that this banknote could facilitate illicit activities,” the ECB said in a statement on Wednesday that it will stop producing the bill from the end of 2018. The note will remain legal tender and can be exchanged at any central bank in the euro area for an unlimited period.
ECB President Mario Draghi has said previously that the use of high-denomination bills for criminal purposes is a reason to consider withdrawing them. The decision is still likely to attract criticism from people suspicious that the central bank, already under attack from savers for its ultra-low interest rates, is trying to abolish cash altogether.
The defense of high-denomination notes has been led by Germany, the region’s biggest economy. Clemens Fuest, head of the Munich-based Ifo Institute, said in an interview with Bloomberg Television on Monday that there is “no justification” for removing the bill. Bundesbank President Jens Weidmann said in March the claim that crime will be curtailed by removing the 500-euro note hasn’t been proven, and the debate risks undermining trust in cash.
Ewald Nowotny, the governor of Austria’s central bank, also opposed removing the bill because it may fuel the general debate over the abolition of cash.
The concern over the future of paper money is partly linked to the ECB’s negative deposit rate on the funds banks park at the institution. While the charge hasn’t typically been passed onto retail depositors, it would theoretically be easier to do so if customers didn’t have the option of withdrawing their savings as banknotes.
That would allow the ECB to cut rates even further as it tries to revive inflation -- a perceived strategy that Draghi has tried to counter.
The debate over the 500-euro note is “not linked in any way to the monetary policy considerations of the ECB’s Governing Council,” he wrote in a letter to a European parliament legislator last month. “Cash is the only form of legal tender within the euro area, and it complements other payment instruments. It offers, and will continue to offer, specific advantages.”
The ECB said on Wednesday that its other notes -- from 5 euros to 200 euros -- will remain in place and that central banks will ensure they are available in sufficient quantities to meet demand.
Abolition of cash is not on the agenda and the euro area can “surely” do without the 500-euro note, Governing Council member Yves Mersch wrote in an article for Spiegel Online on Thursday.
“Just because criminals use mobile phones to coordinate their activities, nobody would seriously consider the idea of banning mobile phones altogether,” Mersch said. “Many law-abiding citizens appreciate a degree of privacy when paying.”
The decision may mean additional costs as production of the other notes is stepped up. By value, about 300 billion euros of the 1.1 trillion euros in cash currently in circulation is made up of 500-euro banknotes. The total replacement cost, including transportation, could be as high as 500 million to 600 million euros, Austrian central-bank official Kurt Pribil has said.