Euro notes have become the world's favourite form of cash because of Europeans' financial habits rather than international demand for the young currency, according to a European Central Bank (ECB) study released yesterday.
Banknote holdings per person are almost twice as high in the 13-country euro zone as in the US, the study shows, while eurozone citizens typically withdraw 50 per cent more each time they use an automated cash machine.
Since the introduction of euro notes and coins in 2002, circulation has soared far above expectations. Last year, the total value exceeded the value of dollar bills in circulation. However, the ECB's study of the euro's international role suggests that global demand for the euro is less important than previously thought and that, beyond Europe, the dollar remains the cash choice.
Net shipments of euro notes to outside the euro zone are on a downward trend, the Frankfurt-based institution says.
Only 10-15 per cent of euro in circulation are held abroad. About 60 per cent of US dollars in circulation are held overseas.
One explanation for Europe's cash addiction could be that the use of payment cards is less developed in many eurozone states than in the US. The ECB believes low inflation and interest rates have increased the attraction of holding cash, while euro are available in higher-denomination notes than dollars. Demand for €500 notes has shown a particular increase since 2002.
Since the cash changeover in 2002, a "reoptimisation" of currency holdings has "led to a considerable increase in the importance of banknotes as a store of value and as a means of payment for large-value transactions", says the ECB.
Excluding notes held abroad, per capita banknote holdings in the US were worth the equivalent of about €870. For the eurozone, the figure was more than €1,600.
Separately, the report suggests that the extent to which countries have switched foreign exchange reserves into euro has been exaggerated by anecdotal evidence. At constant exchange rates, the euro share in reserves "has remained broadly stable" since 2005, it says. The dollar remains the most important reserved currency with its share also hardly changing, the report adds.
"This contrasts with several press reports, partly based on official announcements by some central banks, indicating a tendency to shift away from US dollar holdings in global foreign exchange reserves."
Between mid-2005 and the end of 2006, the euro share in the stock of international debt securities and in international loans and deposits also declined. The euro became less important, too, in the settlement and invoicing of imports into the eurozone - probably reflecting the higher cost of oil, which is priced in dollars.
