When it comes to moving money nefariously, the €500 note has been especially handy. Photo: AP
A suitcase stuffed full of cash may soon be worth a lot less.
In a move aimed at hampering cash transactions by terrorists, drug dealers and money launderers, the European Central Bank on Wednesday announced an end to the €500 bank note, worth roughly $760.
When it comes to moving money nefariously, the €500 note has been especially handy.
It is a large denomination in a widely circulated and easily convertible currency. In the United States, the largest denomination is $US100, after the Federal Reserve discontinued the $US500, $US1,000, $US5,000 and $US10,000 bills in 1969. Switzerland has a 1,000-franc note, worth about $1,400, but its supply is limited.
The €500 note is also more compact and convenient for evading the gaze of authorities. The equivalent of $US1 million, in that high euro note, weighs about2 kilograms and fits in a small bag, according to a Harvard University study this year.
After the European Central Bank phases out the €500 note by the end of 2018, the next highest denomination will be the €200 note. That same $US1 million would weigh roughly 2 1/2 times as much.
And using $US100 bills is just downright bulky. That would clock in at 10 kilograms and require an entire briefcase to carry.
Getting rid of the €500 bill "will make life harder for criminals, raising their costs and increasing their detection risks," Peter Sands, lead author of the Harvard study and a former chief executive of British bank Standard Chartered, wrote in an email Wednesday.
US law enforcement officials have noted for years that the euro has become the currency of choice for drug cartels. European Central Bank officials acknowledged Wednesday that €500 bills play a role in illegal transactions like money laundering and in financing terrorism. And the Harvard study said that, in some circles, criminals refer to the note as a "Bin Laden," after the former leader of al-Qaeda, Osama bin Laden.
While the necessity of the €500 note has been debated for a while, the pressure to abolish it grew after the terrorist attacks in and around Paris in November and in Brussels in March.
"An argument we can no longer ignore," Benoit Coeure, a member of the central bank's executive board, said in an interview with French newspaper Le Parisien in February, referring to the note's use for illicit activities.
The decision Wednesday to phase out the notes by the European Central Bank's Governing Council does not immediately remove from circulation the roughly €300 billion worth of the purple €500 notes, which depict an unidentified modern building on one side and a bridge on the other.
The decision simply means that, beginning at the end of 2018, central banks in the 19 countries of the eurozone will no longer replace €500 bills that are returned for sorting or other reasons.
The European Central Bank said it would not take the more radical step of declaring that €500 bills are no longer legal tender. Such a move would have meant the notes could no longer be legally used for transactions. People with €500 notes would have had to bring them back to a central bank to be exchanged for smaller denominations.
Sands said the central bank could take steps to discourage use of the notes still in circulation, for example, by requiring banks to ask questions when customers present €500 bills for deposit.
To critics, the steps taken Wednesday were seen as an infringement on personal freedoms, as they make it harder for people to opt out of the traditional financial system.
Those opposed to the move argue that criminals are not the only ones to use large bills. There was a surge in demand for €500 bills during the global market panic that came after the collapse of investment bank Lehman Brothers in September 2008, according to a 2011 study by the European Central Bank. Some people no longer trusted the banking system and preferred to hold cash.
One leading German economist also accused the European Central Bank of ulterior motives. With fewer large bills, it will be easier for the central bank to push interest rates to new lows, said Clemens Fuest, president of the Ifo economic research institute in Munich, which has been critical of the central bank's cheap money policies.
That is because for almost two years the European Central Bank has been charging lenders a negative interest rate to keep money in its virtual vaults, which are considered the ultimate safe haven. The policy is intended to push down market interest rates and force banks to lend money rather than hoard it. Currently the central bank deposit rate is minus 0.4 per cent.
In theory, banks can avoid this de facto rent on their deposits by holding cash in their own vaults. But in practice it is expensive to store large amounts of bills safely -- and it would become even more so if the denominations were smaller.
With fewer €500 notes available, the banks might be even more likely to do what the European Central Bank wants them to do, which is lend money rather than sitting on it.
"It would be significantly more expensive for banks and savings banks to store lots of smaller bank notes, " Fuest said.
