Are national governments in the Euro Area about to lose another vital piece of their economic sovereignty?
One of the more interesting and, dare I say, encouraging developments to have taken place in the payments sphere in recent years has been the gathering trend among city and state authorities in the United States to pass laws banning direct-to-customer businesses from refusing cash payments, with the state of Florida becoming the latest to join the trend. It is one of the rare slivers of hope in the ever-escalating Global War on Cash (GWoC). In Europe, a similar trend is taking place, albeit at the national level.
One major difference between Europe and the US is that cash is still the number one retail payment method in Europe, though its use diverges sharply among countries. The governments of both Switzerland and Austria, two of Europe’s biggest cash-loving countries, are considering passing laws to protect the role of cash as a means of payment. The first country to turn such ideas into policy, however, was Slovakia.
In June last year, the national government in Bratislava passed an amendment to the national constitution stating that “everyone has the right to make a payment for the purchase of goods and the provision of services using cash as legal tender,” and that “the acceptance of such payment may only be refused for reasonable or generally applicable reasons,” including security (e.g., risk of robbery) and technical reasons (e.g., a vending machine that does not accept cash). Also guaranteed by the new law is the right to perform a cash transaction in a bank or a branch of a foreign bank.
The constitutional law was unanimously adopted by the National Council of the Slovak Republic. In total, as many as 111 of the parliament’s 150 MPs supported the amendment, reports English-language newspaper Slovak Spectator. According to the deputies, the complete abolition of cash in the future could seriously impact low-income groups as well as civil associations that finance their charitable activities from fundraising. Preserving the right to cash, they said, is also an essential step in promoting the financial literacy of the younger generation.
A Letter from Lagarde
But the new law is already in serious trouble. On January 13, the European Central Bank published a letter signed by the ECB President Christine Lagarde warning that: a) it had not been consulted on the law before its passage; and b) no euro zone member has the competence to introduce such measures in the monetary policy realm. Put simply, as the letter states, rules governing the status of legal tender of euro banknotes are “an area of exclusive competence of the Union under Article 133 of the Treaty.”
In other words, national member governments of the Euro Area do not have the right to protect cash’s status as legal tender. As such, the ECB (emphasis my own) “recommends that the provisions of Article 39a… of the Constitution guaranteeing the issuance of cash as legal tender and the right to make a payments in cash should either be deleted or, alternatively, amended to merely refer to the relevant provisions of Union law” — in other words, brought back in line with EU laws on legal tender.
Worrying, the ECB does not appear to be overstepping its legal bounds. In 2021, two German journalists, Norbert Häring and Johannes Dietrich, brought a lawsuit against the German public broadcaster Hessischer Rundfunk for not accepting cash payments for their radio and television license fee. A German court ultimately ruled in the claimants’ favour but, uncertain whether it was infringing on the EU’s exclusive competence over monetary policy in the eurozone, it referred the matter to the European Court of Justice (ECJ).
Here are a few key sections of the subsequent press release following the ECJ’s preliminary ruling:
First, the Court of Justice interprets the concept of ‘monetary policy’ in the area in which the
European Union has exclusive competence for the Member States whose currency is the euro.
The Court begins by stating that that concept is not limited to its operational implementation but also entails a regulatory dimension intended to guarantee the status of the euro as the single currency… It adds that the concept of ‘legal tender’ of a means of payment denominated in a currency unit signifies that that means of payment cannot generally be refused in settlement of a debt denominated in the same currency unit.Last, it points out that the fact that the EU legislature can lay down the measures necessary for the use of the euro as the single currency reflects the need to establish uniform principles for all Member States whose currency is the euro and contributes to the pursuit of the primary objective of the European Union’s monetary policy, which is to maintain price stability…
Consequently, the Court rules that the European Union alone is competent to specify the status of legal tender accorded to banknotes denominated in euro…
[T]he Court notes that the status of legal tender of banknotes and coins denominated in
euro implies, in principle, an obligation to accept them. However, it makes clear that that obligation may, in principle, be restricted by the Member States for reasons of public interest, provided that those restrictions are proportionate to the public interest objective pursued, which means, in particular, that other lawful means for the settlement of monetary debts must be available.
In the end, the ECJ ruled that in this particular instance it is up to the German court to determine whether the broadcaster’s refusal to accept the cash payments is “proportionate to the objective of actually recovering the radio and television licence fee, in particular in light of the fact that the lawful alternative means of payment may not be readily accessible to everyone liable to pay it.” The ruling also made clear that euro cash cannot “generally” be refused in settlement of a debt.
More importantly, however, the ECJ’s ruling confirmed that: a) the EU has exclusive competence over monetary policy in the EU; and b) said competence extends beyond matters of operational implementation to include “a regulatory dimension.” That includes in all areas relating to its status as legal tender.
A Highly Convenient State of Affairs
So, if I am interpreting these two legal-financial documents correctly (input from readers with a legal, financial or regulatory background most welcome), the ECJ in its 2021 ruling is essentially saying that EU national governments can, if they so wish, take legislative actions to restrict the use of cash so long as they can present a compelling enough public interest case. Meanwhile, according to the ECB’s recent letter to the Slovakian government, EU Member States cannot take similar such legislative actions to protect the use of cash.
This is highly convenient given that many EU national governments would like nothing more than to further restrict the use of cash — for their own benefit as well as that of the banks, fintechs, big techs, payment companies, large retailers, etc, whose interests they serve most of the time. At the same time, a smaller number of governments actually want to preserve the right of their citizenry to use cash by enshrining it in their national constitution. And according to the ECB, by EU law they don’t have the right.
As far as I’m aware, only two countries have so far actually openly talked about taking such action. One is Slovakia; another is Austria.
Austria is one of Europe’s biggest cash lovers. In August last year, the Austrian chancellor Karl Nehammer began suggesting that being able to continue using cash for payments rather than cards or digital currencies should be enshrined in the Austrian constitution. This apparently caught the attention of Martin Selmayr, the former secretary-general of the European Commission (2018-2019), who argued that any such rule would be in contravention of EU law. In November, European Commission for Economy Paulo Gentiloni was asked about the issue in the European Parliament. His response:
Since monetary policy in the euro area falls within the EU’s exclusive competence (Article 3(c) TFEU), Member States cannot legislate or adopt legally binding acts in that area, unless the EU empowers them or if they do so for the implementation of EU acts (Article 2(1) TFEU).
The Commission recently adopted a proposal[3] for a regulation based on Article 133 TFEU, aiming at safeguarding the role of euro cash, to ensure it is widely accepted as a means of payment and remains easily accessible for people and businesses across the euro area.
Fox, Meet Chicken Coop
This, of course, is a classic case of the fox guarding the hen house. For the best part of the past decade, the Commission has been trying to do everything it can to reduce cash use in the EU. Together with the ECB, it is determined to launch a digital euro, which both insist will coexist with cash. But for how long? And under what conditions? It is not hard to foresee both EU institutions prioritising a digital euro once it has been launched and is fully operationally — after all, CBDCs offer the prospect of far greater monetary, economic and social control.
Coincidentally, three months ago the European Central Bank announced that it is pushing for an explicit ban on unilateral cash exclusions by businesses in the Euro Area. As I noted at the time, the move was a largely welcome development that may have been in response to the growing number of Euro Area governments talking about taking matters into their own hands and enshrining the use of cash in their national constitution:
Slovakia has already taken this step while Austria is talking of doing the same. In Germany, most citizens, young and old, refuse to abandon cash. In fact, so ingrained is the country’s fondness for cash that it recently prompted an exasperated article in Foreign Policy magazine titled “Germany Is Hopelessly Addicted to Cash.” The subheading: “Why Europe’s biggest economy won’t make the switch to paying with cards.”
But perhaps what the ECB is really doing is trying to head off the threat of national governments taking unilateral action in this area by announcing that it — and it only! — will ensure that businesses in the Euro Area can’t ban cash payments? After all, it will be a lot easier and less messy for the central bank to reverse course on its own later down the road, once the digital euro is well established, than have to force a number of Member States to remove cash-protection amendments from their constitution. Better to nip it in the bud right now.
For the moment, this is purely conjecture and it is possible that I am doing the ECB a disservice here. While there can be a significant divergence of opinion within central banks on the question of cash’s future, the ECB has hardly been a consistent defender of cash over the years. As Norbert Häring, one of the two journalists who initiated the court case in Germany, reported in June 2021, when the ECB tasked a working group of the European Retail Payment Board (ERPB) with producing a report on securing access to and acceptance of cash, it filled the group with many of the same financial entities that are trying to kill cash:
The ERPB is an ECB-led advisory group. Members are representatives of banks and other associations involved in payment transactions, as providers, merchants or consumers. Entrusting this group with the task of helping to preserve cash – a group, whose very definition of payment transactions strangely excludes cash – has led to a clash with ESTA, the association of the European cash industry, which had been invited to participate in the working group as a non-member of the EPRB.
ESTA withdrew from the bank dominated working group in protest and has now published a report, which it says “will usefully complement the ERPB report in areas where it is unlikely that the working group will venture.”
Two key paragraphs from that report:
The first critical aspect is to take stock of the fact that the decline of cash is not happening just by chance. Looking at what a number of central banks are saying on the matter, it appears provoked by the conflict of interest that exists in the realm of the stakeholders primarily responsible for making cash available to the public. Having their own, more profitable, payments instruments to offer to their clients, banks have very little interest, if any, in cash and are publicly and recurrently acting against it.
None has actually decided to go fully cashless. If they did, they would lose most of their retail customers. However, as in a concerted action driven by their common interest, they reduce cash services to the public, and sometimes even sponsor retailers to become cashless, to accelerate the phase out of cash. Their short-term cost of such actions will be offset by the increase of fees once cash will no longer be competing, making such practices predatory in their essence. If any other product or service than cash would be at stake, there is no doubt that such practice would be declared contrary to fair practice and competition rules.
In a recorded phone conversation with one of a pair of notorious Russian pranksters, whom she thought was Ukrainian President Volodymyr Zelensky, ECB President Christine Lagarde said the following:
“Now we have in Europe this threshold. Above €1,000 you cannot pay cash. If you do you’re in the grey market. You take your risk. If you get caught, you get fined or you go to jail.”
This is simply not true — at least not for most Euro Area economies (France and Spain being notable exceptions). In March last year — the same month Lagarde had her video chat with the fake Zelensky — MEPs agreed to set limits of “up to €7000 for cash payments and €1000 for crypto-asset transfers, where the customer cannot be identified.” And even that was too low: in the end the EU had to settle for a bloc-wide cash limit of €10,000. So why did Lagarde make such a flagrantly false claim about cash limits?
If the ECB and the Commission get away with this latest power grab, to seize the right of national governments to protect cash use, it will mean that national governments in the Euro Area have even less of a say over the economic rights of their citizens than city and state authorities in the United States. Whether they are able to get away with it will ultimately depend on how the governments and citizens of the countries directly affected react to the threat of losing yet another piece of their economic sovereignty.