Foreign Demand for Euro Banknotes

In order to understand why there is a continuous increase in euro banknote circulation even though the use of cash for transactions is decreasing in the euro area – a phenomenon known as the paradox of banknotes – the members of the Overseas workstream of the Eurosystem Research Network on Cash (EURECA) 1 have conducted a study on the foreign demand for euro banknotes. The results of this study are based on desk research using data collected in the Eurosystem and from other organisations, and using both proven and innovative techniques. The objectives of this study are to identify the drivers of foreign demand and to estimate the share of euro banknotes circulating outside the euro area. The results provide an insight into the reasons for the increase in banknote circulation. They also show how significant the international demand for euro banknotes is, providing us with a clue to understanding the paradox of banknotes. The study shows that there are a multitude of factors behind the demand for euro banknotes, for both store-of-value and transaction purposes. In particular, euro cash flows are mainly driven by local-specific determinants, i.e. factors affecting a country’s demand for euro (local inflation, economic activity and foreign tourism) rather than external factors (global uncertainty or short-term interest rates in the euro area). On the back of this research, the share of euro banknotes in circulation estimated to be outside the euro area is between 30% and 50% of the total value of euro banknote circulation.