The European Central Bank is studying whether to issue a digital euro, with a decision on the next steps coming in October 2023
Three progress reports have already been published where the ECB outlines the characteristics of the digital euro:
- Access: The digital euro will be an electronic means of payment for all retail users in the euro area.
- Monetary anchor: The digital euro should be an instrument to preserve the role of public money as an anchor of the payment system in the digital age.
- Strategic autonomy: The digital euro should contribute to Europe’s strategic autonomy as a digital means of payment and a European infrastructure.
- Use Cases: The first ECB report motivates the main “use cases” or market segments to be served based on potential market size and the policy objectives “harmonisation of payment solutions” and “European strategic autonomy.
- Transfer mechanism: There will be two prioritised transfer mechanisms: online, validated by a third party, and offline, peer-to-peer validated.
- Privacy: The digital euro should respect the right to privacy as required by law.
- Tools to control amounts in circulation: To prevent the structural substitution of bank deposits, the ECB is proposing the “limit-and remuneration-based tools in the design of a digital euro to curb its use as a form of investment”
An assessment of the first two ECB reports
In this paper, Dirk Niepelt discusses the digital euro aspects that have not, or not sufficiently been considered in the first two progress reports:
The first report suggests that the digital euro can help preserve public money as the anchor of the payment system, but it does not explain how the decline in cash use endangers the anchor role or how a digital euro would mitigate the associated risks. It motivates the digital euro as contributing to Europe’s strategic autonomy, but does not clarify whether the autonomy concerns national security, cheaper payment services, or monetary sovereignty, and why either of these would suggest a focus on consumers rather than business users. More generally, the report discusses few economic motives for a digital euro in depth and this raises doubts about the proper sequencing of design choices. Some arguments for privacy restrictions are not fully convincing. The most important shortcoming of the first report is the lack of analysis of why digital euro holdings as stores of value are not desirable (or why this issue is beyond discussion) and whether strategies to limit such holdings cause collateral damage.
The second report lacks a discussion of incentive compatibility of the envisioned public-private partnership model. It also lacks detail on the proposed settlement, funding and defunding models and on the incidence of the payment scheme’s costs.
The reports do not discuss implications for central bank balance sheets, interest rates, political interference, and the ECB’s mandate to introduce a digital euro.
Digital Euro: An assessment of the first two progress reports
Author: Dirk Niepelt
From: University of Bern
The digital euro as a monetary anchor?
Bonfinger and Haas, in this paper, show that a digital euro is not needed as a monetary anchor for the euro area:
We argue that a CBDC can be justified as an anchor for bank deposits, but this would require unlimited access to a store of value, whereas the ECB envisages very limited CBDC holdings as a means of payment. Anchoring the national currency as a unit of account requires the stability of the currency. For the central bank’s control over the financial system, it is crucial that banks need central bank money as a means of payment and settlement. Thus, it is the holding of central bank money by banks, and not by non-banks, that is required as the ultimate monetary anchor for the financial system. Finally, the experience of several major central banks shows that the appropriate response to the declining use of cash in retail payments is not a CBDC, but the orchestration of competitive national retail payment systems.
The Digital Euro (CBDC) as a Monetary Anchor of the Financial System
Authors: Peter Bofinger, Thomas Haas
From: University Würzburg
On limiting the digital euro holdings
In this report, Christian Hofmann questions the assumption that caps on digital euro holdings would be necessary in the interest of financial stability:
This paper argues that the paramount reason for introducing a digital euro should lie in the imperfections of the existing money landscape that offers the public suboptimal choices for store of value and payment transactions. In that respect, the introduction of a digital euro holds great promise for the public, and this paper focuses on one of the most essential design features of a digital euro. The European Central Bank (ECB) plans to introduce a limited version of a digital euro that would cap the maximum amounts of digital euros that individuals can hold, but this paper challenges the ECB’s assumption that such caps are needed in the interest of financial stability. The concerns voiced by the ECB and other central banks about the risks from sudden outflows of liquidity from bank deposits to CBDC are realistic, but this paper argues that these risks are manageable and that a digital euro might even support financial stability in a banking crisis. Properly implemented, an unlimited digital euro would allow central banks and other authorities to wield control more effectively during bank run scenarios and improve their overall ability to manage crises situations.
The case for unlimited holdings of digital euros
Author: Christian Hofmann – Economic Governance and EMU Scrutiny Unit
Further doubts
Ignazio Angeloni is less sanguine about the benefits of a digital euro:
The [digital] euro is unlikely to increase financial inclusion in the eurozone but could help solve the longstanding problem of the high costs and delays of cross-border workers’ remittances. For this objective, a limited and targeted version of a PDE [ prospective digital euro] (i.e., not open to all citizens and enterprises) would be adequate, coupled with interoperability of central banks on a bilateral basis.
All arguments considered, this author’s opinion is that the ECB should continue its exploration, including a testing phase, but in the end not launch a PDE unless new elements emerge strongly supporting such a decision. At the present time, the risks and imponderables of this enterprise are stronger than the arguments in favour of it.
Digital Euro: When in doubt, abstain (but be prepared)
Author: Ignazio Angeloni
From: European University Institute
