Eurozone coaxes savers to spend old cash hoards

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The Independent Online

Perhaps the European Central Bank should copy the story of Aladdin and employ peddlers to walk the streets of Europe offering new cash for old.

Billions of francs, marks, pesetas, guilders, lira and schillings have poured out from under beds and bottom drawers all over Europe in the past year, but a huge quantity of high-denomination hoarded notes in "old" currencies remains unaccounted for.

With only three weeks to the launch of the single currency, officials are worried that an avalanche of large cash conversions after 1 January – with a boom in cash purchases over the new year – could disrupt the transition to the euro and confuse calculations on money supply and the health of economies.

The French central bank estimated at the beginning of this year that there was up to £15bn in cash hoarded in France at any one time, mostly in Fr500 notes. Much is the proceeds of "work on the black", not declared to the tax authorities. Many older people, however, have never learnt to trust banks and have continued to store their savings under the mattress – or in what the French callbas de laine (woollen stockings).

By the beginning of December, the French government calculated that £7bn of this hidden money had returned to the "visible" economy, either by deposits in savings accounts or by cash spending on holidays, antiques, property, house extensions or even vintage wine.

There has been something of a boom in sales of consumer hardware, but most hoarders appear to have spent their cash on commodities that can be resold for euros in the new year. There has even been a run on "open" long-haul air tickets, which can be reimbursed in euros if not used.

In theory, shops can refuse to accept more than Fr20,000 (£2,000) in cash at one time, but these restrictions have been widely ignored – with tacit official encouragement.

Anxious that the conversion should be a popular success, the French government has dropped broad hints that it will not inquire too closely into the origins of modest-to-large sums of cash produced by individual citizens.

The changeover should be a "transition, not an inquisition", said Laurent Fabius, the Finance Minister. None the less, with 21 days to the arrival of the euro – and only 69 days to the speeded-up disappearance of the franc on 17 February – there remains about Fr80bn (£8bn) unaccounted for. That amounts to some 1,600,000,000 Fr500 notes.

One private banker in Paris commented: "Secrecy becomes a habit, a drug. Some people are paralysed by the idea of coming forward, whatever assurances the government gives. It is not just the old ladies with their life savings. I know for a fact that one of our clients, a doctor, has Fr3,500,000 francs in Fr500 notes (ie £350,000) at his home). He is still trying to work out what to do with it."

Under French law, private individuals are allowed to change up to £6,500 of francs into euros over a bank counter with no questions asked up to the end of June. It would therefore be possible for the doctor to change all his cash if he visited 50 different banks in the next 25 weeks.

Similar problems exist elsewhere. Spanish banks estimate that an extra 100,000 flats have been sold for cash this year, taking £3bn in pesetas out of the hidden economy. A slump in property sales is forecast next year. About the same amount again has been spent in cash on jewellery, works of art and consumer hardware. At least another £6bn in pesetas is thought to be still hoarded.

In Austria, the government reckons £3bn in schillings is stashed away and expects a vast spending boom this Christmas. In Germany, an official drive to bring in an estimated £3bn of small change, stored in bottles and drawers, has been a great success. However, several billion pounds of mark notes are still thought to be out of circulation.

European banking officials fear a surge in cash spending over the next 11 weeks could distort figures on money supply within the eurozone and produce a brief, artificial economic boom. A French official said: "Such a boom would be fine, except that it may also be followed by an equally brief and artificial slump, just at the moment when we want people to be thinking positively about the euro."