Think Tank European Parliament
Digital Euro -When in doubt, abstain (but be prepared)

Digital Euro: more risks than benefits at the moment

The paper signed by Ignazio Angeloni for the Think Tank European Parliament, at the request of ECON (Economic and Monetary Affairs) concludes that although the European Central Bank (ECB) should continue its exploration and perhaps also launch the test phase in October, however it should not actually launch a digital euro unless new elements, other than the current ones, emerge in the future in favor of such a step. At present, the risks and imponderables of this enterprise are stronger than the arguments in favour of it.

Key findings of the report on the potential launch of the Digital Euro:

  • Unclear use case: It is not clear that there is a niche market for a PDE (prospective digital euro), nor that a PDE has a good chance of establishing itself in today's highly diversified, competitive, innovative and rapidly evolving retail payments sector. The payments system is already efficient and progressing steadily; there are no "market failures" to suggest that central banks should intervene directly.

  • New relationship between Commercial Banks and ECB: Currently, banks in the euro area handle most retail payments and settle them on their deposit accounts; in the new situation, they would compete with the ECB (the EDP would be an alternative to a bank deposit) and also cooperate with it (because they would perform all front-end functions for the EDP).

  • Neither too successful nor too unsuccessful. The EDP must be attractive enough not to be a market failure, but not too attractive to subtract a large share of intermediation from the banking sector. Achieving this middle ground is difficult.

  • A possible remuneration could interfere with the ECB's interest rate policy, which is currently conducted by adjusting the ECB's deposit facility rate; a divergence between the two rates would encourage arbitrage operations.

  • A digital euro would accelerate bank runs: The cap on EDP balances at €3,000 suggested by the ECB may not be sufficient. Customers may prefer to convert their normal euro into digital euros, leading to liquidity tensions. This risk is exacerbated by the incompleteness of the banking union, namely the lack of a Europe-wide deposit insurance.

  • The idea of a monetary anchor is misleading: if it is understood as the sense of security that individuals derive from the possibility of converting their bank holdings into a safe asset at par, no instrument currently fulfills this function better than tangible cash.

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