Flight to cash due to corona crisis

The corona crisis has caused a flight to cash, according to figures from the European Central Bank. While the use of cash has continued to decline due to the pandemic, people have started hoarding more banknotes as an alternative safe haven. The central bank therefore speaks of a 'paradox' in the way people look at cash. The role of cash is increasingly shifting from a means of payment to an alternative means of savings, and there is something to be said for that.

Unlike money in a bank account, cash does not suffer from negative interest rates. As a result, it can be lucrative for ultra-wealthy people to hold a little more cash. In any case, it can't hurt now that the savings rate is at zero. A second argument for holding cash is that it has less counterparty risk. With a savings account, you are dependent on a bank, while you always have cash at your disposal. When people are concerned about the stability of financial institutions and electronic payments, they may instinctively decide to withdraw money from the bank.

Flight to cash

The value of all euro banknotes in circulation increased from €1.28 trillion in February 2020 to €1.43 trillion in February this year, an increase of almost 12%. This is the fastest rate of growth since the 2008 financial crisis, when several banks were still in danger of collapsing. At that time, the amount of cash in circulation rose faster, because there were acute concerns about the stability of the banking sector. The corona crisis shows a more gradual flight to cash, but is at least as large in total size.

Flight to cash due to corona crisis (Source: ECB)

What is the role of cash?

Due to the corona pandemic, the use of cash has decreased considerably, for fear of possible contamination. That risk appears to be very small, but it has brought about a structural change in the way people pay. Last year, for example, a survey by the ECB showed that four out of ten people have been paying more often contactless and less with cash since the corona crisis.

"A decreasing flow of banknotes in and out of the Eurosystem central banks shows that active circulation has decreased. This suggests a greater demand for cash as a precaution against increased uncertainty", the central bank said.

However, there are big differences between countries in the way people use cash. A 2019 survey found that one in six people in Greece still paid their mortgage or rent in cash, while one in five Italians even paid their energy bills in cash. By comparison, in countries like France and the Netherlands, almost no one made that kind of cash expenditure. In some countries, cash is still a popular means of payment, while in others it is mainly an alternative means of savings.

International role of the euro

Another aspect that should not be overlooked is that euro banknotes are increasingly being used outside the monetary union. The International role of the euro has grown in size over the past few years. For example, many countries see the currency as a fully-fledged alternative to the US dollar. Especially now that the United States is increasingly using the dollar as a means of political pressure.

According to the central bank, only one in five euro banknotes in circulation is currently used for payments within the currency union. Most of it serves as an alternative Store of Value or is used outside the currency union. 

This new trend shows that cash still plays an important role, but as an alternative Store of Value. The ECB is also aware of this and therefore wants to be better prepared. The central bank says: "If cash is widely used as a safe haven during turbulent periods, then it may be necessary to maintain a substantial strategic stockpile of banknotes to meet exceptionally high demand in times of crisis."

Update: In the original article, the graph said billions of euros, but it must be trillions. This has since been adjusted.

This contribution was made from Geotrendlines