The total value of euro banknotes in circulation rose during the Covid-19 pandemic from €1.3tn (US$1.5tn) at the end of 2019 to €1.4tn (US$1.7tn) at the end of 2020, the European Central Bank (ECB) reports.

The “exceptionally high” year-on-year increase of 11% compares with a 5% annual growth rate over the past 10 years and comes despite a decrease in the proportion of cash transactions carried out in the euro area and ongoing increases in contactless card and mobile payments and in online shopping.

According to the ECB’s findings, the key driver for this growth in demand is the use of cash within the euro area for “precautionary purposes (ie as a store of value)” by households, monetary financial institutions and businesses during the Covid-19 pandemic.

“A phenomenon referred to as the ‘paradox of banknotes’ has been observed in the euro area; in recent years, the demand for euro banknotes has constantly increased while the use of banknotes for retail transactions seems to have decreased,” an ECB research bulletin states.

“Recent payment surveys indicate that the share of cash transactions in the euro area has decreased. This, together with ongoing digitalisation in retail payments, might have been expected to lead to a decrease in the demand for cash.

“However, this reduction in demand has not occurred. In fact, the number of euro banknotes in circulation has increased since 2007.”

“Decomposing banknote circulation into its three components (euro area transactional demand, store of value inside the euro area and foreign demand) is key to explaining this increase,” the ECB bulletin adds.

“The share of the value of banknote circulation held for euro area transactions is thought to be between 20% and 22% (the upper and lowest bounds indicate this share may be between 13% to 30%, but these are based on extreme assumptions and central estimates are deemed reasonable).

“This reduced share highlights the importance of the other two components of cash demand: the store-of-value demand inside the euro area (28% to 50% of total circulation value in 2019) and the foreign demand for euro banknotes (30% to 50% in 2019).”

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