The ECB officially decided to end production of the €500 note yesterday, with production winding down at the end of 2018. Ostensibly this was done to prohibit the use of the €500 note by criminals and terrorists. While this is just one step in the long-term War on Cash, what might some of the more immediate effects be?
1. Increased Demand – Knowing that the €500 note is going to be phased out, expect those holding cash and those wanting to hold cash in the future to increase their demand for €500 notes. Whether the ECB will cater to this demand by allowing higher amounts of €500 notes to be printed before the ultimate phaseout date remains to be seen.
2. Premia on Notes in Good Condition – Given a finite number of notes in existence post-2018, it is not unreasonable to expect that €500 notes may trade at a premium to their face value in the future. Since they will remain legal tender and will be able to be redeemed at face value at banks for an unlimited period of time, they will be worth at least €500. But because they allow a much more compact transportation of money than €100 and €200 notes and because supply will now be fixed, they may begin trading at a premium to their face value. €500 notes in mint condition might eventually trade on black markets at €550, €600, or more. Bills in worse condition would trade at lower premia, until bills that were completely worn out would be traded in at banks for brand new lower-denomination notes.
3. More Counterfeit €500 Notes – Because the €500 note is being phased out, it will not receive any anti-counterfeiting updates that other notes will inevitably receive in the future. As counterfeiters become more adept at creating fake euro notes, they will target the €500 note since it will remain redeemable at banks and will undoubtedly be demanded even more on the black market. If counterfeiting of the €500 note occurs on a large enough scale, the ECB may eventually rescind the bill’s legal tender status and set an end date by which time all €500 notes must be redeemed.
