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Global Economy

20 years of the euro: why Germans love their cash – and why abolishing it is unthinkable

This text contains a classification of current events, which, in addition to data and facts, also includes the assessments of the author or the experts who have their say. Here you will find information about the different types of journalistic texts.

Are you more the cash type? Then you are not alone in Germany, on the contrary: the majority of Germans prefer to pay with coins and bills. Although this has decreased somewhat as a result of the corona pandemic, according to a study by the Bundesbank, 60 percent of all transactions are still processed in cash.

Quite different in northern Europe. In Sweden, cash payers are in the minority. In many shops there it is no longer possible to pay with cash. Scientists even assume that Sweden could become a cashless society in the next few years.

Don’t worry, in Germany we are not only miles away geographically – abolition of cash is also not an option in this country. And there are only a few scientists who have spoken out in favor of it so far.

The former economist and economist Peter Bofinger from the University of Würzburg dared to initiate such a discussion in 2015 and justified it with the fight against drug trafficking and terrorism financing. However, he apparently received so much criticism for this that he no longer wants to say anything more about the abolition of cash.

Why the Germans are so attached to cash

The cash and the Germans – or rather, the German speakers. Because the tendency to pay with cash is high in Germany as well as in Austria and Switzerland. The business psychologist Julia Pitters explains this with the greater importance of traditions in these countries.

This is less pronounced in Sweden, the people there are more open to new technologies, says the professor at the IU International University. Since 2016, many Swedes have been paying via smartphone with a specially developed banking app called Swish, which was available before Google Pay and Apple Pay.

“In Germany, better spending control or the feel of having something in your hand are frequently cited as reasons for cash,” says the business psychologist in an interview with our editors. “With cash, I know what I have, it’s tangible. With a credit card, paying is more abstract – it doesn’t hurt that much to spend something.” In addition, the Germans are rather skeptical about paying by card or mobile phone because of data security. This skepticism is less pronounced in Sweden.

An essential function of cash is also revealed in its psychological function as a store of value, says Silke Finken from the International School of Management in Munich. This is also shown by a study by the Bundesbank: according to this, more than two-thirds of cash holdings in 2018 could be explained by hoarding motives.

Cash costs depend on the purchase amount

Whether we pay with coins and notes or with a card is a question of convenience and security for the customer and a question of costs for the retailer, says Frank Bulthaupt from the University of Finance and Management in Bonn. In the case of cash, there are personnel costs for cashier times, cash register statements and costs for money transport companies and deposits at the bank. With card payments, on the other hand, there are costs for card terminals as well as for maintenance and software.

According to a measurement by the Bundesbank, the costs for cash payments are lower compared to cards because, among other things, the payment process is shorter. However, this only applies to smaller amounts, for higher amounts it is the Girocard contactless and the normal Girocard. “Investigations have shown that cashless payment is more economical from a cash amount of around 20 euros,” says economist Bulthaupt and adds: “In contrast to cash, cashless payment always requires functioning technology. However, if the technology fails over a large area, it also breaks the market largely together.”

Less crime without cash?

An important point is the link between cash and crime. To combat money laundering and terrorism, the EU Commission wants to set the upper limit for cash payments at 10,000 euros. However, the EU states and the European Parliament still have to approve these plans.

But how successful would such a move be? “In theory, upper limits for cash payments limit the possibilities for money laundering. However, this is only relevant if other transfer channels do not offer any easy alternatives,” explains finance scientist Finken. Therefore, EU anti-money laundering and terrorist financing regulations would need to be extended to the crypto sector – notably through a ban on anonymous crypto wallets and an obligation on service providers to exercise due diligence when establishing customer identity. This is also provided for in a proposal by the EU Commission.

Does cash promote the informal economy?

Apart from terrorism and money laundering, informal economy and tax fraud related to cash payments are mentioned again and again. According to estimates by the Institute for Applied Economic Research (IAW), the size of the shadow economy has remained relatively stable over the past 20 years in absolute terms (2020 at 322 billion euros), but has declined slightly relative to gross domestic product (GDP).

The percentage share of the underground economy in GDP shows that the share in Germany is similar in a European comparison to, for example, Sweden, Norway and Finland – i.e. in countries where the share of cash payments is significantly lower.

“Due to the level of the proposed upper limit for cash payments, the daily shadow economy is unlikely to be affected. A higher intensity of tax audits and an expansion and promotion of electronic payment methods are therefore more suitable for combating them,” says Silke Finken.

Incidentally, there is still no upper cash limit in Germany, but since August 8, 2021, bank customers have had to present a so-called proof of origin for cash deposits of more than 10,000 euros.

And what about other countries? 60 percent of countries have upper limits for cash payments between 500 euros and 15,000 euros, with some countries excluding cash payments between private individuals.

Cash vs. card and mobile phone – a look into the future

An Allensbach study assumes that payment by card and mobile phone will increase significantly in Germany in the future. “Young age groups in particular have said goodbye to cash. Paying with cards or smartphones has long been established here,” says the study. But even among the over 60-year-olds, the change towards cards can already be seen. “Due to the innovative will of the younger age groups and the gradual approach of the older generation, the dichotomy when it comes to paying will gradually soften in the future.”

Economist Frank Bulthaupt also assumes that cash will be used less and less every year. “However, a complete abolition of cash seems unthinkable: the trust in our money, which is largely created by cash, would then be destroyed. The search for an alternative currency would then be expected,” he says.

Digital euro as an alternative

Even the economist Ralf Fendel cannot imagine that cash will be abolished in the foreseeable future. “The opposite is the case. The European Central Bank has announced that it wants to revise the banknotes and is looking for new motives for this,” says Fendel.

At the same time, the ECB is working on the digital euro. It should not be about bank money, as it is on the current accounts of commercial banks. “The digital euro is a claim against the central bank. The central bank will apply the same criteria as for cash – i.e. check that each digital euro is unique,” says Fendel.

Technologically, it should be a cryptocurrency because it is encrypted. However, the economist does not assume that the blockchain technology of Bitcoin will be used for this. “What exactly the technology will look like has not yet been clarified. At the beginning of the year, the ECB started an evaluation phase for a possible technology.”

Other states are further along

Fendel estimates that it will take another five to ten years before the digital euro is introduced. “It won’t happen quickly because there will only be one chance not to lose the trust of users,” he explains.

Apart from small island states, where digital central bank currencies are already being used today, large states such as China are also in the test phase with their own digital central bank money. The Swedish central bank, which is not part of the euro area, is also about to do the same.

In the long term, Fendel assumes that all central banks will not be able to avoid this type of digital money. Because there is a threat of competition: “If central banks don’t do it, tech companies like Facebook will do it with its Diem. And that’s not controlled by the central banks. But I think money is a public good and that shouldn’t be regulated by Mark Zuckerberg .”

About the experts: As a professor at the IU International University, Julia Pitters heads the business psychology course.
Frank Bulthaupt is Professor of Capital Markets and Economics at the University of Finance & Management in Bonn.
Ralf Fendel is Professor of Monetary Economics at WHU – Otto Beisheim School of Management.
Silke Finken is Professor of Innovation Management and Financial Services at the International School of Management in Munich.

Sources used: Studie aus dem Jahr 2020 über das Zahlungsverhalten der Deutschen, Initiative Deutsche Zahlungssysteme: Allensbach-Umfrage zum Bezahlen in Deutschland, Schwedischer Handelsrat: Schweden wird bald bargeldlos: Forschungsbericht, Studie über die Kosten für das Bezahlen, Institut für Angewandte Wirtschaftsforschung: Studie über die Schattenwirtschaft in Deutschland aus dem Jahr 2020, Europäische Zentralbank: Der digitale Euro Study from 2020 on the payment behavior of the German initiative German payment systems: Allensbach survey on payment in GermanySwedish Trade Council: Sweden will soon be cashless: Research Study on the costs of payment Institute for Applied Economic Research: Study on the shadow economy in Germany from 2020 European Central Bank: The digital euro

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