European digital euro YES, but fiat will play a role in the digital world
3 min readSpeaking at the joint Franco-German Parliamentary Assembly, President of ECB Christine Lagard has delivered her views about exploratory activities of introducing the digital euro. In the evermore digital financial environment, Lagard sees digital currency as a strategic means to preserve the sovereignty of the EU’s payment system.
Due to the ongoing pandemic of Covid-19, EU regulators have identified an accelerating growth of both contactless and digital payments across the economic union and Eurozone. The main concern of the ECB’s leadership is that, in the digital economy of the future, the Eurozone payment system could become reliant on digital currencies controlled by a potentially adversarial party. In effect, to lose its autonomy.
To achieve this goal and preserve the European payment system with a sovereign currency at its core, ECB is exploring implementing the digital euro. This digital currency or CBDC would function side-by-side of the fiat euro.
Digital Euro – the future of Union
Lagard identifies the current global health crisis as a cause of accelerating structural changes in the global economy. The move toward a more digital world was starting much before this crisis, but the measures for containing the pandemic implemented around the world are driving the changes.
She was issuing a call to accelerate the Digital Single Market’s development, thus delivering the economy of scale to digital companies and providing uniform solutions for the problems of cybersecurity and data protection. This way, EU would strengthen its autonomy and protect it in the digital world of tomorrow.
Currently, the ECB is exploring the costs and advantages of adopting the digital euro. These explorations are centered arond the work of their Internal Crypto-Assets Task Force (ICA-TF).
Benefits of digital euro, and risks
Emerging trends of consumer spending and digitalisation of the financial world are bringing the spotlight on the suitability of fiat money for the future world. Many central banks are already exploring the possibilities of issuing central bank digital currencies (CBDC).
Among these investigations and one of the most important ones, due to potentially wide-reaching effects, is the work of ECB. Their analysis is based on the premise of hypothetical digital euro that will compliment the fiat euro and bank deposits.
A research paper published this year by ECB’s ICA-TF is pointing out several benefits and risks of creating digital euro, for both financial stability and efficiency of the payment system.
They identify this CBDC as a potential risk-free user-friendly asset that is fulfilling the need for a highly liquid asset in the digital economy. This would be allowing ECB’s monetary policy to impact a wider range of economic actors.
But ECB’s task-force is identifying a potential pitfall of this development. Such increased liquidity could make bank runs much easier in the times of downturn, and the amount of CBDCs in circulation must be limited for the purpose of preventing this.
A critical feature of the fiat money, from a consumer perspective, is the anonymity and consequent privacy. This could be technically difficult to replicate with a digital currency, and ECB’s task-force has concerns that the digital euro would become a problem for enforcing the AML regulations.
Currently, the internal analysis of the demand for a CBDC inside the Eurozone is coming to the conclusion that it is not significant. Both fiat euro and cashless payments are very popular. But going forward into the digital world ECB will need to assure that their monetary policy is fit for it.
