ORGANIZED CRIME AND THE 500 EURO BANKNOTE

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V13 2010 INDEX E-SYLUM ARCHIVE

The E-Sylum: Volume 13, Number 31, August 1, 2010, Article 22

As readers of The E-Sylum no doubt remember well, when the rapper Jay-Z flashed 500-euro notes in the movie "American Gangster" (2007), this was taken as a portent of the decline of the dollar as a world currency.

The Wall Street Journal now reports on the growing popularity of the 500-Euro note among the criminal element. Indeed, the newspaper suggests that the seigniorage gains from issue underwrite the viability of the Eurozone project itself.

Given the success of these notes, it is clearly incumbent upon American policymakers to rethink their outdated commitment to Benjamin Franklin!

Gangsters, drug dealers and money launderers appear to be playing their part in helping shore up the financial stability of the euro zone.

That's thanks to their demand, according to European authorities, for high-denomination euro bank notes, in particular the €200 and €500 bills. The European Central Bank issues these notes for a hefty profit that is welcome at a time when its response to the financial crisis has called its financial strength into question.

The high-value bills are increasingly "making the euro the currency of choice for underground and black economies, and for all those who value anonymity in their financial transactions and investments," wrote Willem Buiter, chief economist at Citigroup, in a recent research report. The business of issuing euro notes, produced at almost zero cost, is "wildly profitable" for the ECB, Mr. Buiter wrote.

In recent years, the profits on its issue of new paper currency have been running at €50 billion. In 2008, the year of the Lehman Brothers crisis, it was €80 billion.

Even with conservative assumptions about future growth of currency in circulation—at, say, 4% a year, which is in line with the ECB's 2% inflation target plus a margin for economic growth—Mr. Buiter estimates future seigniorage profits for the central bank between €2 trillion and €6.9 trillion.

An ECB spokeswoman says there's no plan to withdraw high-value notes, national equivalents of which were used in six member states before the euro was launched. They will be retained when a redesigned series is issued in coming years.

Replacing them with small denominations would increase production and processing costs, she says.

To read the complete article, see: How Gangsters Are Saving Euro Zone (online.wsj.com/article/SB10001424052748704532204575397543634034112.html)

Wayne Homren, Editor