Measuring and Understanding Foreign Demand for Euro Banknotes

The European Central Bank (ECB) study, 'Foreign Demand for Euro Banknotes', set out to identify the demand drivers for euro banknotes and to estimate the share of euro banknotes in circulation outside of the euro area.

The authors wanted to understand whether external demand explained the 5% per annum growth in cash in circulation over the last 10 years. The conclusion is that 30-50% of the total value of euro banknotes in circulation is outside of the euro area. Demand is not driven by factors such as global uncertainty or short term interest rates, but by locally specific determinants such as local inflation, economic activity and foreign tourism.

The paper started by suggesting demand for the Swedish krona is for domestic transactions, for the Danish krona for domestic transactions and as a store of value, and the euro for domestic transactions, a store of value and for international use. They suggested that these different cash usage profiles were why Sweden’s cash usage is declining, Denmark’s is stable and the ECB’s is growing.