While the Federal Reserve, the Bank of England and most recently the Bank of Japan are doing everything in their power to weaken their currencies, the ECB has kept its main interest rate flat and is not buying any assets in the markets.
But in a note signed by Bank of America Merrill Lynch foreign exchange strategist Athanasios Vamvakidis, he argues that by getting rid of the 500 euro bill, the central bank could eventually weaken the euro.
Vamvakidis cites an ECB study that suggests that only one third of the 500 euro bills in circulation are used for transactions, with the rest used as store-of-value.
Demand for the bill – which is the highest denomination bill among the G10 currencies – kept rising after the introduction of the single European currency, with the value of 500 euro bills in circulation increasing from 30 billion euros in January 2002 to 300 billion euros in November 2011, at the peak of demand.
The bill makes up 33% of the total euros in circulation currently, compared with 13.7% when the euro was introduced.
But, Vamvakidis added, demand for the 500 euro bill recently declined, with the shift in terms of the share of the value of total euros in circulation starting in early 2010, when the Greek crisis erupted; in terms of actual demand for the bill, the decline started in the autumn of 2011, when Spain and Italy came under market pressure.
He believes there are three main reasons for the recent fall in demand for the 500 euro bill: the eurozone crisis and uncertainty about its final outcome, fighting tax evasion, especially in the peripheral eurozone countries, which may have reduced demand for the bill as an "easy to carry and easy to hide denomination" and the eurozone recession, which reduced the circulation of all euro banknotes.
'NOT SUPPORTING THE EURO'
"The recent decline in the circulation of the €500 bill may not yet be enough to affect the euro negatively, but we would not downplay it," Vamvakidis said.
The decline is only of about 7 billion euros since November 2011 but "we can say that the demand for the highest euro denomination is not supporting the euro anymore," he said. "Furthermore, the relative decline in the demand for the bill may reflect a more general decline in the demand for the euro as a store of value, which could be one of the reasons explaining its gradual weakening since the crisis started."
Vamvakidis said that if the ECB removes the 500 euro bill from circulation, it will have "a number of benefits."
Such a move would reduce demand for the euro as a store of value, which would weaken the currency and help the eurozone recover from recession, it would address worries that the bill is used to hide income from illegal sources and would help raise revenue by taxing illegal activity.
Vamvakidis advocates giving the public a month to deposit all 500 euro bills in European banks.
Depositors would be asked to provide evidence of legal income sources for deposits of 500 euro bills above a specific amount and all the 500 euro bills that are not deposited in a bank or not justified by legal income would be declared as ECB profit.
Then, the eurozone can use the proceeds to recapitalize the banks in periphery countries, to capitalize the single currency area's rescue fund the ESM or to reduce the periphery's sovereign debt burden.
"We believe that the revenue raised in such a scheme could be sizable," Vamvakidis said. "The value of €500 bills amounted to €290 billion in February 2013. If most of it cannot be justified by legal sources ... the eurozone can raise a substantial amount of funds to help address the ongoing periphery crisis."
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