From an economic point of view, the easiest way to understand the novel digital euro is to imagine that it is exactly the same as cash, but in electronic form. This has generated some controversy, as it could seem like a first step towards ending cash , especially now that negative interest rates are close to bottoming out without having achieved a perfect transmission of monetary policy. However, the European Central Bank (ECB) has categorically denied that the intention is to end cash.
What is the digital euro?
The digital euro is not a new currency, not a crypto asset , not even bank money. Although for the ordinary consumer there is no difference when paying with euros in cash or with a card, the difference is important when analyzing these movements of millions of consumers in monetary aggregates and in bank balance sheets.
Cash is part of the monetary base (the purest money) , while payment with cards or electronic money is part of the money supply, money created by commercial banks. The digital euro will be like cash, a pure, public money, created and kept in the central bank.
The digital euro will make ‘public’ electronic money available to everyone, allowing people to open an account directly with the central bank, without intermediaries. Today, only private banks (and other financial institutions) have access to this type of electronic money through the reserves they keep in the central bank and for which they pay a penalty of -0.5%, the famous interest rates negatives.
The European Central Bank has published a series of details in which it tries to argue the need to implement the digital euro. The note explains that in the euro zone there are already a variety of options when it comes to payments made by retailers: money from the central bank in the form of cash, money managed by private banks, for example, through deposits, and non-bank digital money (such as payment cards). But there is no digital or electronic money issued by the central bank and accessible to everyone.
Why introduce the digital euro?
-Cash is being used less and less. The digital euro can be a good complement (perhaps a substitute in the long term) to keep the use of money more pure. The ECB explains that the euro zone lacks a digital currency issued by the central bank that can be used for all of our daily transactions, even in electronic commerce.
“A digital euro would fill this gap: it would be an electronic form of central bank money accessible to all citizens and businesses; in other words, a digital equivalent of euro banknotes. It would provide free access to a simple, secure digital means of payment. and risk-free, accepted throughout the euro area. In the digital age, it would preserve the public good that the euro provides to European citizens. “
Christine Lagarde, President of the ECB, has emphatically assured that the digital euro is not a substitute for cash , but the truth is that at first glance it might seem so. Jörg Krämer, chief economist at Commerzbak explains that it will be like using money from central bank money.
“Until now, central bank money has only existed in the form of private bank balances in their accounts with the central bank and as cash (banknotes) in the hands of households and businesses. Thus, central bank money represents a right of banks and other institutions against the central bank (for the ECB it is a liability) “.
This should not be confused with the balances that individuals and private companies have in their commercial bank accounts, which are mostly made up of ‘money’ created by the bank through the money multiplier . Therefore, if one day a large group of people were to take out billions of euros in cash and put them under the mattress, the bank could have a serious problem.
-A more effective monetary policy in the future . This question is totally related to the previous one. At present, banks and investors can wade through the negative ECB rates by transforming their liquidity into cash (it also has a storage cost), if the digital euro replaces cash and all the pure money is in the ECB, it would be a lot more difficult to avoid negative rates, which in turn would allow a more perfect transmission of monetary policy.
“Cash limits the ability of the ECB to impose penalty interest rates higher than the costs of storing and insuring cash. However, if at some point the use of cash were to be drastically reduced, the ECB could use negative rates on digital euros to allow for significantly negative interest rates. From the ECB’s point of view, this option is attractive because, given the decline in the equilibrium real interest rate (natural interest rate), it might require a nominal interest rate more negative for driving the economy into a recession. Many Anglo-Saxon economists see this as a huge advantage of central bank digital money, “Jörg Krämer.
-Maintain the primacy of the euro . On the other hand, this innovation by the ECB seeks to maintain the primacy of the euro as a form of payment in the face of the emergence of new types of ‘money’ and payment methods that are increasingly reducing the weight of cash payments, which are ultimately the only payments made with pure money created by the central bank.
“A digital euro would ensure that even in a situation where there is rapid digitization in the world of payments, sovereign money remains at the core of the European payments system. This would contribute to financial inclusion. It would also protect us from risk. that a public or private digital means of payment issued and controlled from outside the euro area could largely displace existing national means of payment “,
D. Tercero-Lucas , a researcher at the Autonomous University of Barcelona and an expert in central bank digital currencies, adds in statements to elEconomista.es that the geopolitical component: “China is one of the most advanced countries in the race for digital currencies. and its aim is to try to displace the dollar as the world’s reserve currency (an extremely arduous task).
The euro has never overshadowed the dollar in this regard. However, with a digital euro launched long before the Fed, perhaps we could play a more relevant role in the international payments system, something that could raise the position of the Euro Zone in world trade. “
-To bring simplicity to digital payments . The ECB ensures that the digital euro will be designed to be easy to understand, easy to use and easy to transfer. Regardless of its characteristics or the technology on which it is based (this is important), people from all strata of society should be able to use it in their daily lives.
As Krämer points out, “digital does not mean that it uses a specific technology such as blockchain (which is often used with cryptocurrencies such as bitcoin). Banks have been using central bank money for a long time to the extent that they can transfer balances from one side. to another with their central bank accounts electronically. The key innovation of the digital euro is that citizens and businesses will also be able to do so in the future. “
-Increase privacy in digital payments . This objective would be achieved thanks to the participation of the central bank, which unlike private payment service providers, has no commercial interests related to consumer data, or at least that is what the ECB says.
However, this project is still in its infancy and many questions remain to be answered . How will this digital euro be accessed? Would citizens be allowed to directly open a digital account at the ECB? Would the negative deposit facility rate of -0.5% apply to this bank account? Will it pose a threat to the intermediary role of traditional banking?
In short, and in the absence of answering all those questions, the digital euro would remain a euro , only in digital form. It is the perfect substitute for cash, but the ECB assures that it is not the objective of this project: to offer an alternative to coins and bills, provide greater security, increase the simplicity of digital payments and compete on equal terms with the new digital assets are the ‘official’ targets of the digital euro.