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Nicolas Menguy
Nicolas Menguy
Articles (2) 

A Cashless Economy at a Cracking Pace: How the EU Commission Short-Circuits Central Banks

The 'fait accompli' strategy has shunted many central banks who oppose the reform, without ever being consulted

April 19, 2017

The European Union Commission knows that the best way to push a reform through is for nobody to notice, by breaking it down into a thousand little adjustments and not packaging it into one major change. Its intention to ban cash from the Eurozone is therefore going at a slow and steady pace, after restricting large amounts of border-crossing cash transfers.

The Deutsche Bundesbank has responded to the EU Commission's move by promoting its International Cash conference “War on cash: Is there a future for cash?” Although the conference is yet to come, its mere existence shows that suppressing currency from our economies is not an obvious should-do for the Bundesbank. If it were, they would quietly go along with the EU's slow choke on cash. The Bundesbank, like many other market participants, has its doubts on the bold move.

Indeed, the perfectly secure nature of digital currency is not convincing to all as a blockade against crime and corruption. The Nigerian Central Bank, which is precisely tackling such matters, “warns against digital currencies. The central bank of Nigeria (CBN) warned banks against dealing with non-bank entities acting as virtual, laundering activities, tax evasion or to finance terrorist networks. Moreover, the central bank reminded, already warned off digital currencies earlier this month. Banks must ensure that such companies perform extensive anti-money laundering and counter the finance.”

Central banks have long figured out that, although crime rings and corruption networks do use cash, they are just as able to use digital currency, using front companies and rattles, to maintain their lucrative and illegal operations.

Why the slow pace, despite the focus on the killing of cash? Probably because of Sweden. After years of discreet lobbying for the termination of currency, when the game was almost won for anti-cash supporters, the central bank in Sweden called for a sudden stop, realizing what dire and immediate consequences were about to occur.

Financial website Finextra reported: “In a statement submitted to the Ministry of Finance’s consultation on access to accounts with basic functions, the Riksbank called for a legal requirement to be introduced which would place a duty on banks to provide cash service as a basic feature of payment accounts. Signed by Stefan Ingves, the Riksbank Governor, the letter states that the banks have reduced their cash handling services too fast, resulting in a lack of cash services in less populated areas in particular, but for the public in general.”

Sweden had naturally been turning more and more to non-cash payment methods, but when the moment came to kill it off completely, the central bank realized what grave problems were about to hit the non-urban and non-middle-class population, which still do rely heavily on cash.

Swedish wind must now sound like a sigh of relief, for having stopped inches from the cliff India has just gone sailing off. Indian Prime Minister Modi announced overnight the outright cancellation of most of the banknotes validity in an attempt to uproot corruption and “black money.” Scratching 90% of the country's banknotes overnight, however, in a country where most daily operations are carried out in cash proved a not-so-good idea.

Economic experts now fear the violent and unprepared reform could have long-term disastrous consequences in addition to the immediate crisis it set off. People lined up by the thousands in queues before banks in a desperate attempt to salvage their livelihood, with an estimated 100 dead due to exhaustion in the waiting lines and other factors. Over the medium run, India's golden economic years, which have pulled it out of the third world to the rank of developing country, may come to an end because of the economic instability created by the reform.

CNN reported that “The country overtook China as the world's fastest-growing major economy this year, but may fall behind again as the withdrawal of big rupee notes hurts business activity. Analysts estimate India's shock decision to scrap its 500 rupee and 1,000 rupee notes -- accounting for about 86% of cash in circulation -- will shave at least one percentage point (and possibly much more) off India's current GDP growth rate of 7.1%. A 3% dip in the growth rate [for the current financial year] wouldn't surprise me," Pronab Sen, India's former chief statistician, said. Sen is country director for India at the International Growth Centre in London.

Skyrocketing market instability, reduction of options and power transfers from national central banks toward the EU are not something national banks are fond of. Even though all agree that cash is the most tedious and expensive payment medium, there is no guarantee that killing cash would solve anything, as there are fears to the opposite.

The goal of the EU Commission is to move the entire European economy into the virtual layer, where it can control economic policies and financial movements as cash escapes its control. Many economic experts, democratic whistleblowers, watchdog agencies and national central banks oppose the reform, seeing it as democratically dangerous and economically unfeasible. Which is precisely why the EU Commission has chosen not to debate the matter with them.

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