Two Decisions from Europe

It might not be on investors' calendars, but European officials will take steps toward addressing two issues tomorrow.  First, the EC will make a preliminary recommendation of visa-free travel in the Schengen area for Turkish passport holders.  Second, the ECB governing council will hold a non-monetary policy meeting.  It is expected to discuss the future of the 500-euro note.  

In exchange for implementing previously agreed upon measures to address the refugees going from Turkey to Greece,  Ankara wanted more financial assistance, restarting EU ascension talks and visa-free travel for Turkish citizens into the EU.    With the Schengen agreement, which is a key pillar of European integration, under threat of the refugee crisis, and political fallout of bolstering anti-immigration and anti-EU parties, the EC readily accepted Turkey's demands. 

The EC announced 72 conditions under which it would accept Turkish passports without a visa.  Some of these conditions related directly to the passports and the security around them.  Turkey appears to have addressed many of these.  However, among the conditions were other demands that had nothing to with the passports or security, like transparency in political funding in Turkey and revising terror legislation to protect minority rights.  Ironically, the EC would make it harder for people who do not have civil liberties to visit Europe without a visa than people who enjoy civil liberties. 

In any event,  Turkey has reportedly met 90% of the EC's conditions.  Tomorrow the EC issues a report on Turkey's progress.  It will likely say more work is needed, but that it may be content to pass the buck to the individual states and the EU parliament.  Turkey's demand was that visa-free travel would be allowed as of the end of June.  To accomplish this member countries and EU parliament need to grant approval, which means that Turkey has about a month to make any further concessions.  

Yesterday the Turkish government agreed to let EU citizens travel to Turkey without requiring a visa.  This was another EC demand.  The Turkish measure will be implemented when the EU waive its visa requirement for Turkey's citizens.    A formal recommendation by the EC is expected in early June. 

Separately, the ECB will discuss the future of the 500 euro note.  Some want to get rid of the 500 euro note because of its use by criminal, terrorist or tax avoidance activity.  The US got rid of its large bills nearly half a century ago.  The largest bill in circulation is $100.  The largest note in the UK is GBP50.  A million euros composed of 500 euro notes weighs about 2 kilos.  A million dollars composed of $100 bills weighs 10 kilos.  

Reports indicate that the 500 euro note does not really circulate, and on the rare occasion when one is used, it is awkward and raises questions. Despite the low usage by most citizens in the EMU, the future of the 500 euro note is controversial.  Germany, Austria, and Luxembourg appear to be leading the push back.  

The opposition seems to be stemming from a few sources  First there is a basic mistrust of the ECB in some quarters.  It has been especially pronounced in Germany.  As the largest saver in Europe,  Germany has been hit among the hardest by the low and negative interest rates.  Second, cash in circulation in the eurozone is about 10% of GDP compared with around 7% in the US.   The greater use of cash in Europe makes some more sensitive to fiddling with denominations.  Third,  with the introduction of negative interest rates, some fear that getting rid of the 500 euro note is a step toward abolishing cash.  Fourth, some have a simple preference for anonymous payments, even though in order to clamp down on tax avoidance, many countries require large payments to be made electronically. 

Those who oppose getting rid of the 500 euro note argue that it would not reduce crime, which seems a reasonable hypothesis.  However, there is no reason that governments should help make it easier criminals or terrorists.  Some have argued that there this is a civil liberty issue; that the removal of 500 euro notes undermines liberty.  While we recognize a logistic challenge, replacing the 500 euro note with more 200 and 100 euro notes is not depriving individuals of anything.  Moreover, it has difficult to make the argument that Americans and Brits are somehow less free than Germans, French or Italians because of the denominations of their currency.  Where ever liberty is to be found, it is not in the particular denominations of money. 

That said, given the sensitivities of the issues, perhaps the best thing the ECB can do is to promise to stop issuing new 500 euro notes, and allow a gradual replacement of them for smaller denominations, but only after a return to positive interest rates.  This would help ease concerns that the ECB want to abolish cash.  It would demonstrate a pragmatic approach and recognize that it is not particularly urgent to get phase out the 50 euro note immediately.  The ECB is best served by securing strategic goals and demonstrating flexibility on the tactics. 

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