[Dave Birch] A bank person mentioned to me that they think the European Commission’s recommendation on legal tender (22nd March 2010) is, as he put it, “strange and undesirable”. That’s actually pretty outspoken for a senior member of staff at at large European retail bank. So what does the recommendation actually say? Well, the key points are as follows:

  • Euro notes and coins are legal tender and retailers can only refuse them for reasons of “good faith” (for example, the retailer has no change).
  • Retailers should only refuse high-denomination banknotes in “good faith” (for example, if the value of the note is disproportionate to the purchase)
  • No surcharges should be imposed on cash payments.
  • Banknotes stained by the Intelligent Banknote Neutralisation System (IBNS) remain legal tender but should be returned to national central banks (as they likely come from a robbery).
  • Retailers must accept 1 and 2 eurocent coins in payment.

Sensible policies for a better Eurozone, you might think. All it the recommendation is doing is simply enforcing the rather obvious rule that euros are legal tender. Except for the bit about surcharging.

The commission also warned that retailers should not impose surcharges on the use of cash instead of credit cards, a rather unusual option that to this date has not actually been imposed by any shops, but the possibility of doing so does exist in theory and Brussels wants to stamp out the idea before it materialises.

[From EUobserver / Commission frowns on shop signs that say: ‘€500 notes not accepted’]

I don’t see why retailers shouldn’t surcharge. Above ten euros, say, the marginal cost of debit cards is less than the marginal cost of cash (for legitimate businesses who pay their taxes) so why shouldn’t the retailer should be able to direct payment choices? And if they also want to surcharge card payments under €10, let them. The customer can then decide which shop to go to.

Incidentally, the surcharge on €500 notes could be quite high, like €20 or something. Why? Because the people with €500 notes are criminals, so they won’t care about the €20 since they already save €400 on taxes.

But what’s the problem? The essence of it is that shops will be forced to accept €100, €200 and €500 euro notes and 1- and 2-euro cent coins. Why? Well, because in many countries the shops don’t want them. In some countries (eg, The Netherlands and Finland) the retailers and the public seem to have, in a decentralised fashion, decided to abandon the 1- and 2-cent coins. They are nothing but a hassle and do nothing to assist commerce. At the other end of the scale, retailers in many countries will not accept high-value notes, partly because they don’t want to make change and partly because they are worried about counterfeiting. After all, if you are a corner shop and you get stuck with a bent €500 note then you are €500 out of pocket: the ECB won’t take your counterfeit note and give you a new one. It’s worth paying 10 cents to the bank for a debit payment to avoid that risk.

I think this recommendation is plain wrong, but it doesn’t take economics into account. Part of the EU’s goal for payment systems should be economic efficiency and forcing your average tabac to take 500 euro notes does not contribute to that goal in any way.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


  1. Dave, I am not following your reasoning.
    The European Commission relies on the ECB to provide financial stability in the “Eurozone” and beyond.
    The ECB is issuing banknotes and coins as legal tender. Any measures that undermine the acceptability of legal tender will have to be unacceptable in the eyes of the ECB.
    So when the ECB says retailers need to accept 1 and 2 cent coins they just make sure legal tender will be dealt with as such. As long as a society or community has decided to do without these, there is no issue since the consumer does not ask for 1 or 2 cent notes to be accpeted. If however retailers decide unilaterally to stop accepting these, they undermine the concept of legel tender. The same is true for €200 and €500 notes – if the ECB would tolerate a wide-spread refusal to accept these denominations they may just as well withdraw them from circulation. Obviously there are very good reasons not to do so (seignorage not the least of them) from the ECB’s point of view.
    Surcharges on cash payments finally do violate the fundamental principal that legal tender needs to be accepted at face value – you would potentially drive the devaluation of currency quite quickly by introducing such a surcharge.
    Like it or not, a majority of people still think ‘Cash is King’ (an the recent credit crunch has caused further reliance on cash) – as long as that’s the case, the ECB and other National Banks will have to protect the acceptance of cash as legal tender and they will not hesitate to seek asssistance in achieving that goal, be it from the European Commission or others.

  2. Thanks for taking the time to raise these issues. My point is about costs. If retailers are forced to incur higher costs by accepting 1 and 2 cent coins, then we should ask whether the benefit to society is more than these costs. Similarly, if the cost to society of having 500 euro notes in circulation is higher than the benefit to the ECB, it is reasonable for citizens to ask whether these notes should exist. Suppose Europe is losing 100 billion euros per annum to tax evasion facilitated by 100, 200 and 500 euro notes — but the ECB is earning 10 billion euros in seigniorage. Is this the right balance for society?

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