The European Central Bank is looking at how it might go about phasing out the 500-euro banknote, the second largest paper store of value in the world after the Swiss 1,000-franc bill. Germany’s Bundesbank too is open to the idea. Yet it’s hard to see whom the elimination of the purple banknote would benefit, despite its dubious reputation.
The 500-euro ($570) bill is something of a libertarian symbol. In a pre-bitcoin world of state-run currencies, it represented one of the best opportunities for a private citizen to fly beneath government radars. It weighs 1.12 grams, so a million euros comes up to just two kilograms — a compact, light package to guarantee independence. A million U.S. dollars in $100 bills is a 10-kilo bag.
What people have done with this embodiment of financial freedom is another question. According to Doris Schneeberger, head of the ECB’s currency management division, "there is no correlation between the use of cash and the black or grey economy" — but that seems untrue. I have calculated the correlation using ECB data on the share of cash transactions in European countries and a recent paper on the size of Europe’s shadow economies by Friedrich Schneider, the continent’s preeminent authority on the subject. It’s a staggering 0.72 — as strong a correlation as can be observed for any real-world phenomena.
In Bulgaria, for example, 95 percent of payments are in cash, and the shadow economy reaches 30.6 percent of gross domestic product, the highest level in the European Union. Large-denomination euro bills are used for illicit or tax-cheating payments in these non-euro countries, too. Yet this is not just a "new" Europe phenomenon. Across the 19 countries that use the euro, the correlation between cash transactions and the estimated size of the shadow economy is 0.74 — marginally stronger […]
