French spending boom predicted

French franc notes must be changed into euros

With the introduction of euro notes and coins looming, many Europeans holding big quantities of cash under their mattresses are facing a dilemma, as John Laurenson reports from Paris for World Business Report.

With just four months to go before the introduction of the new European currency, citizens in the 12 EU countries adopting the euro are gathering the cash savings they have stored at home.

If they don't change their money into euros it will become worthless, but many don't want to take their cash to the bank for fear of attracting unwanted attention from the taxman.

The amount of hoarded cash in France is so colossal that the consequences of the switchover to the euro could have a far more profound effect on the economy than a short-term spending boom.

The Bank of France estimates that 150 billion francs (about $20bn) are stored in this way.

French bankers predict a sharp rise in consumer spending over the next few months as people choose to spend this money rather than change it into euros.

Cash hoarding

Valerie Plagnol, a currency-exchange analyst with the French bank CIC, says that traditionally the French are known for keeping cash at home, although this method of saving is less popular now.

"It's still true that a lot of people hold cash at home; don't put it in the bank; maybe by tradition, maybe for safe-keeping."

Valerie Plagnol

She says that it is common throughout Europe for people to be less than honest with the taxman.

"We do expect some of that so-called black money will come out and people will start spending money in cash to avoid going to the bank and maybe having to justify where that money comes from. That's a very strong possibility", she adds.

So just how is the black money going to make its way into the legitimate economy?

Buying real estate abroad is a possibility for some.

There are reports of an upswing in house sales in Spain but in France buying property for cash is illegal, as is using cash to buy shares.

For those who want to keep their money in cash, the solution could be trading in their francs for a currency outside the euro zone.

Changing currency

In France you can change the equivalent of $8000 in a high-street money changer with no questions asked.

Jean Manouvrier, is the manager of one such money changer in Paris.

"It happens, I'm not going to tell you the contrary. People come in with the maximum sum in French francs and buy currencies which are out of the euro zone - pounds sterling, Swiss francs or dollars, mostly," he said.

"It's difficult to say because this sort of customer only comes in once, but I imagine, given there are about 300 money changers in Paris, that a number of them go on to change similar sums with other money changers after they've left this place", he adds.

"We've had a small but significant increase in this sort of business over the past few months"

Jean Manouvrier

The French central bank is concerned that "small and significant" could turn into "big and significant" in the months leading up to the switch over to the euro.

Any increase in the flow of money out of the euro and into rival currencies such as the dollar could impact on the euro's value on the foreign exchange markets.

"It can add to its weakness," says Valerie Plagnol. "We keep the view that, for structural reasons up to the changeover, there is a kind of a fundamental trend that is rather against the euro versus the dollar because there will be a consistent flow of money outside of euro zone currencies into the dollar prior to the changeover", she adds.

Bending the rules

Concerned that large sums of money could slip out of the euro zone ahead of the changeover, the French central bank has decided to bend the rules.

From 1 January, consumers will be able to go into any French bank and get the same deal as offered by the money changers.

They will be able to use cash to buy up to 10,000 euros without anyone asking where the money came from.

But will this be enough?

As they say on the dollar bill, "In God We Trust"... but for those French people with a lot of cash and plenty to hide, trusting the banks could be another matter.