THE EURO - IDEAL FOR DRUG BARONS

The drug barons of Colombia and the Russian mafia could be among the main
beneficiaries of the single European currency, according to a book out
tomorrow. Large denomination euro notes will make it easier and cheaper to
smuggle their illegal profits across borders.

Smuggling cash can account for up to half the cost of drug-running. The
largest value note will be 500 euros (about #350), whereas the $100 note is
worth only around #60. The dollar is the smugglers' preferred currency. "$1
million in $100 notes fits in a briefcase; $1m worth of 500 euro notes
could be packed in a purse," claims Kenneth Rogoff, of Princeton
university.

"The demand for large denomination notes comes mainly from agents
interested in storing and transporting very large sums... such agents tend
to be involved in the underground economy."

Over the last 20 years there has been a rapid increase in the supply of
cash in industrial countries, even taking account of economic growth. There
is $1,500 in cash per US citizen, although the average amount held is only
a tenth of that. Central banks have concluded that the discrepancy (more
than $330 billion) can be accounted for only by foreign holdings and
criminal transactions.

Other large notes, such as the 100,000 Italian lira, devalue too quickly
and are thus expensive to hold for long. The 1,000 Deutschmark note holds
its value but is produced in relatively modest numbers: obtaining (or
spending) large quantities tends to be noticed.

Rogoff suggests the euro's large denominations will give Europe a big
advantage in competing for the prestige of the global market for hard
currency - and that up to 80 per cent of the notes printed by the European
Central Bank will end up in underground or foreign hands.

His answer? The central bank should either not print the large
denominations or prohibit its use in large transactions.

"Emu: Prospects and Challenges for the Euro", published by Centre for
Economic Policy Research.