29th Sep 2023


Digital euro — opportunity, or solution in search of a problem?

  • Currently, the EU commission and the ECB heed too much to the concerns of the commercial banking industry that sees its traditional business model under stress (Photo: alles-schumpf)
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The digital euro is a great opportunity to address real problems, such as lack of access to digital payments, fragmentation of the European payment infrastructure and financial fragility. A key feature of the digital euro is that it is an inherently stable form of money that could, in the long run, become the stable backbone of the monetary and financial system.

However, realizing this potential will require a much higher limit than the €3,000-4,000 currently proposed by the European Central Bank (ECB).

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Much wider access to digital euros would not only improve stability but also subject banks to market competition. If considerably more funds are moved from bank deposits to digital euro accounts, banks will have to seek out alternative funding sources, mainly long-term debt and equity. This may increase funding costs and reduce credit, but that credit will now come at a price that reflects its true risks and avoids the problem that banks privatise profits and collectivise losses. Market discipline will then make banks and the banking system more stable and resilient in the long run.

Unfortunately, the European Commission's legislative proposal presented last month and earlier ECB reports fall short of this potential.

Over the past two years, several commissioners and ECB board members have ascribed great potential to public digital money.

However, they also have narrowed the objectives of the digital euro and increasingly baked the interests of the banks into the design, following the arguments of the banking lobby.

As a result, the opportunity to develop an appealing alternative to private bank deposits has only been partially realised, and the narrative of the commission and ECB has now become so modest that several argue that the digital euro is "a solution seeking a problem".

There is however a big ̶ and attractive ̶ narrative that could be told. In the short term, the digital currency could become a universally accessible means of payment for all Europeans that offers a high level of privacy and data protection and is free of costs for users. In the longer term, public digital money offers a unique opportunity to solve some systemic problems in the monetary and financial system.

According to an OMFIF research in 2020, trust in commercial banks is largely negative in most developed countries. The recent bank failures in the US and the bailout of Credit Suisse have likely further undermined this trust.

One problem with the current monetary system is that bank deposits and banks are inherently fragile. Or, as Martin Wolf, chief economics commentator at the Financial Times, put it: "Banks are designed to fail — and they do."

To avoid instability, banks and bank deposits are now heavily protected and regulated. Examples include legally-required deposit guarantee schemes and implicit government guarantees to safeguard deposits. The inherent fragility, the explicit and implicit guarantees, the increasingly complex regulations and the entanglement of public and private affairs are systemic problems but currently not mentioned as 'problem drivers' by the commission and the ECB.

Recently, the European Parliament's committee on economic and monetary affairs asked three economists and two legal scholars to assess the ECB reports. All these experts also question the limit and argue that the digital euro could possibly make monetary policy more direct and effective.

Unfortunately, the commission and the ECB do not address their assessments.

In a transition phase, a limit could be justified to give all actors in the financial sector time to adapt, but it should be gradually phased out over time. A stepwise increase of caps could go hand in hand with a stepwise reduction of deposit guarantee schemes that now guarantee a vast amount of cheap funding for the banks.

Reducing government protections and regulations of the banking sector and levelling the playing field will lead to the growth of alternative payment and lending institutions. This will increase competition and diversity, and reduce our total reliance on too-big-to-fail banks and the problems that such banks have proven to create for financial stability.

Achieving a stable monetary system and deepening European financial markets in the digital age is in everyone's interest. A well-designed digital euro has the potential to serve people's interests and improve financial stability in the long run. At the moment, the EU commission and the ECB heed too much to the concerns of the commercial banking industry that sees its traditional business model under stress.

The European banking model will change but survive, as will productive investments. The ECB and the commission should ensure that the digital euro develops into an attractive form of public digital money and contributes to solving systemic problems in the monetary and financial system.

Author bio

Martijn Jeroen van der Linden is professor of practice in new finance at The Hague University of Applied Sciences. Adua Dalla Costa is policy officer at Positive Money Europe. Tristan Dissaux is a post-doctoral researcher at Université Libre de Bruxelles. Wojtek Kalinowski is co-director at the Veblen Institute. Mark Sanders is professor of international economics at Maastricht University. Aleksandar Simić is researcher at Sustainable Finance Lab. Vicky Van Eyck is executive director at Positive Money Europe.


The views expressed in this opinion piece are the author's, not those of EUobserver.

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