By Nicholas Larsen, International Banker
On June 15, Fabio Panetta, a member of the European Central Bank’s (ECB’s) executive board, appeared before the European Parliament’s Committee on Economic and Monetary Affairs (ECON) to discuss the progress being made on the development of a digital euro, almost a year after the ECB formally announced the commencement of a 24-month exploratory investigation into the potential adoption of a eurozone central bank digital currency (CBDC). And according to Panetta’s report, significant progress is being made to provide Europeans with a digital means of payment—a CBDC that they can use throughout the euro area for their everyday payment needs.
Across the world, central banks have been exploring the concept of a CBDC for several years, with some being keener on the idea than others. While the eurozone appeared to adopt a fairly neutral stance on the issue, it would seem that the idea of a CBDC for the region is now gaining considerable traction. Indeed, the European Commission (EC) announced in February that a bill for a digital euro could be proposed in early 2023 to provide a legal framework for the project’s advancement.
This followed the Commission’s announcement in July 2021 that it had launched a two-year investigation phase of a digital euro project that would focus on key issues regarding the design and distribution of a potential CBDC. “It has been nine months since we published our report on a digital euro. In that time, we have carried out further analysis, sought input from citizens and professionals, and conducted some experiments, with encouraging results. All of this has led us to decide to move up a gear and start the digital euro project,” ECB President Christine Lagarde said at the time. “Our work aims to ensure that in the digital age citizens and firms continue to have access to the safest form of money, central bank money.”
And Panetta has taken the lead on the project, having already shown considerable support for a digital euro, which he previously stated would fortify the bloc’s monetary sovereignty and provide a form of central bank money for making daily digital payments across the euro area in the same way cash is currently used for physical transactions. In June, Panetta argued in front of ECON that bringing central bank money into the digital era is a logical move as payments become increasingly digitalised, which he explained is critical for two main reasons.
“First, we need to preserve the role of public money as the anchor of the payments system in order to ensure the smooth coexistence, the convertibility and the complementarity of the various forms that money takes. A strong anchor is needed to protect the singleness of money, monetary sovereignty and the integrity of the financial system,” Panetta explained. “Second, a digital euro would contribute to our strategic autonomy and economic efficiency by offering a European means of payment that could be used for any digital payment, would meet Europe’s societal objectives and would be based on a European infrastructure.”
But not everyone is enthused over the prospect of a digital euro entering circulation. The Centre for European Reform (CFER), a think-tank focused on advancing the European Union’s (EU’s) global presence, has argued that introducing a CBDC would ultimately prove to be of little benefit to consumers in Europe. “Europe’s banking sector is robust, and deposits are guaranteed up to a generous limit. Consumers, quite reasonably, consider bank savings to be about as safe as cash. And CBDCs would probably be provided via commercial banks, and could allow payments through a mobile app, a card, or a similar device,” Zach Meyers, a CFER senior research fellow, wrote on June 7. “So a CBDC could look similar to any bank account today. State-backed savings options are already available for those who want them. Whether consumers and retailers would actually prefer to use a CBDC for payments—rather than private payment services like today’s cards—is therefore not obvious.”
Meyers also highlighted a commonly posited argument against the widespread use of CBDCs—that overenthusiastic adoption might lead to the digital euro being used for investment purposes in addition to simple daily payment transactions, which would mean that should consumers be able to shift their bank deposits into CBDCs, it would make banks significantly more vulnerable to runs as they may end up not having enough in reserves to lend to borrowers. “And if consumers have more of their savings in CBDCs and less in bank deposits, then banks will need more expensive wholesale funding to provide loans to customers,” Meyers added. “That would drive up the cost of finance for households and businesses.” As such, Meyers proposed, CBDCs would require caps and limitations to prevent bank runs.
At his June appearance in front of the Committee on Economic and Monetary Affairs, Panetta addressed this issue by confirming that a digital euro, if issued, would be capped at 1.5 trillion euros (US$1.6 trillion). “Keeping total digital euro holdings between one trillion and one and a half trillion euro would avoid negative effects for the financial system and monetary policy,” Panetta stated. “As the population of the euro area is currently around 340 million, this would allow for holdings of around 3,000 to 4,000 digital euro per capita.”
Panetta also highlighted two additional factors that should be considered when drawing up the initial parameters for limiting or disincentivising holdings of the digital euro for investment purposes. Firstly, citizens’ adoption of a digital euro should be gradual, such that it would take “several years” before a majority hold the currency. And secondly, caution is recommended when calibrating potentially effective tools for preventing the digital euro from being used as a form of investment rather than solely as a means of payment “and then adjust based on experience and the take-up of the digital euro over time”.
There are also legitimate concerns over what a digital euro would mean for banking within the eurozone. The Institute of International Finance (IIF), a 450-member-strong trade group for the global financial-services industry, urged further verification of the assumption that a CBDC is a good idea. With members including JPMorgan Chase, Goldman Sachs, the International Monetary Fund (IMF) and Visa, the IIF stated after June’s ECON consultation that it wants to see “a clear qualitative and quantitative impact assessment of the range of possible designs of a digital euro”, looking at the “various risks…to financial stability”, the group’s managing director for digital finance, Jessica Renier, said in an interview, as reported by CoinDesk.
And in terms of how traditional banks would position themselves in an expanding world of digital currencies, doing away with their role would “would be extremely detrimental to financial stability and the economy, that is good for no one…you can’t exist without the banking system,” Renier added. “I would say a retail CBC certainly poses some potential challenges and risks. They’re not insurmountable challenges. But it’s important that we work through some of those challenges and risks ahead of time.”
More than anything, a CBDC should offer something that is not being offered and meet an unfulfilled need within the market. Does a digital euro perform this role? Only the eventual adoption numbers within the eurozone will provide an accurate answer. But it should also benefit individuals and businesses throughout the economy without posing any additional threat to the financial system’s stability. As such, the ECB should proceed gradually to address such issues.
That said, as more and more central banks roll out their own digital currencies, it could be damaging for the eurozone to be left behind. “If we don’t satisfy this demand, then others will do it. As co-legislators you will play a key role in any changes to the EU legislative framework that may be necessary to introduce a digital euro,” Panetta told the European Parliament last November. “The idea would be that, let’s say, four years from now, we will be ideally ready to issue the digital euro. It’s a very complex project, never done before… I’m a bit optimistic that in four years’ time, we will be prepared.”
The roadmap for rolling out a CDBC has changed frequently due to dramatic shocks inflicted on the global economic environment, such as the COVID-19 pandemic and the war in Ukraine. The planned launch of Facebook’s stablecoin Libra was also a wake-up call for central banks around the world, although the project has since been abandoned. But it now seems the ECB is willing to up its pace and has received support from important member nations to do so. “We must push forward with full speed. No one will wait for us,” German Chancellor Olaf Scholz said last year when he was finance minister. “I am convinced that eurozone countries need to take part more actively in the process and play a stronger role.”