Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

The digital euro: a flawed concept doomed to flop

Peter Bofinger 19th December 2022

Peter Bofinger argues that on the ‘digital euro’ the European Central Bank has dug itself into a hole it would do best to vacate.

European Central Bank,ECB,digital euro
The digital euro has the potential to be an embarrassment for the ECB (3dkombinat/shutterstock.com)

The ‘digital euro’ has become the prestige project of the European Central Bank. In the words of the ECB president, Christine Lagarde, ‘the digital euro is not a stand-alone project, confined to the payment domain. It is rather a cross-policy and truly European initiative that has the potential to affect society as a whole.’

But so far it is difficult to see how the digital euro will be institutionally designed and what its business model will comprise. (Even the term is misleading, since a ‘digital euro’ of sorts has existed since the introduction of the single currency in 1999, in the form of bank deposits denominated in euro—only with the introduction of euro cash in 2002 was the euro also physically available.)

Put simply, there are two design options. The ECB could create a new payment object, which could be used in existing payment systems such as credit cards and Paypal; European citizens would be able to open a digital-euro account with the ECB. More ambitiously, it could establish a new payment system, in which payments would be made using digital euro. The choice is akin to developing a new car to drive on existing highway networks or establishing a new network for the new car, which would then compete with existing networks.

It is obvious that the ECB wants to create a new payment object. Fabio Panetta, a member of its executive board, speaks of ‘a means of payment that could be used for any digital payment’. Panetta explains the need for the digital euro thus:


Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content. We will never send you spam and you can unsubscribe anytime.

Sign up here

[W]e 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.

In the view of Lagarde this anchor function requires ‘that citizens can convert private for public money at par, which ensures that all forms of money can be used indiscriminately for payments throughout the economy’.

Anchor of stability?

While it is true that the credibility of commercial bank systems relies on the ability to exchange deposits without limit with central-bank money, the ECB’s plans do not meet this requirement. So far, it wants to restrict individual holdings of the digital euro to a very low level: under discussion is a limit of only €3,000. That would be a far cry from the ECB’s claim to create an anchor of stability with the digital euro, by guaranteeing the exchange of bank deposits at par with central-bank money.

Such a low limit would also eliminate the potential advantage of a deposit held directly with the central bank. While a central-bank deposit is an absolutely safe asset, commercial bank deposits up to €100,000 have that quality too, as their holders are protected by the deposit insurance guaranteed by their national government.

But the digital euro should not only be discussed as an alternative to a deposit at a commercial bank. In the view of the ECB its main rationale is providing a digital alternative to cash. Seen from this perspective, a better name for it would be ‘digital cash’.

This however immediately highlights the problem that such a design combines features which in the eyes of most consumers are mutually exclusive. One could say that digital cash would be as unattractive as alcohol-free wine: just as wine drinkers like wine because of the alcohol, most users of cash use it as a means of payment and store of value precisely because it is physical.

This preference for a physical means of payment is reflected in the fact that circulation of cash relative to nominal gross domestic product has been rising for decades in the United States and, latterly, the euro area, despite the impressive technological advances in retail payments (figure 1). The argument of the ECB that ‘public money could ultimately lose its role as the monetary anchor’ is not so far supported by the evidence.

Figure 1: currency holdings as a proportion of GDP (%)

Picture 1 4
Source: ECB

Thus, the digital euro project must go beyond simply providing a new payments object. Would it not be a good idea to develop a European payment system competing with the dominant US platforms? In fact, the latter is purportedly one of the key objectives the ECB says it wants to achieve with the digital euro: ‘A digital euro would also strengthen the monetary sovereignty of the euro area and foster competition and efficiency in the European payment sector.’


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

The analogy of the highway shows that successful payment systems have the advantage that a wide variety of cars can be driven there. Paypal, for instance, permits payments with different objects and instruments: deposits held at commercial banks in different jurisdictions with (26) different currencies; credit cards as payment instrument, which draw on deposits held with commercial banks as payment objects; crypotcurrencies, and deposits held directly with Paypal.

High profits

According to the information available so far, the ECB seems to envisage a payment system in which one can only pay with a deposit in the form of the digital euro. What could make such a system prevail over Paypal, credit cards and so on? One argument proferred again and again is that it could process payments at more favourable conditions than the US platforms, which indeed make high profits.

But price is not the only feature that matters when it comes to use of payment systems. Consumers in eurozone member states already have the option of using low-cost payment systems for simple transactions.

For instance, in Germany, the Girocard provided by the banking system is a low-cost instrument which is already more widely used than cash. Transaction costs are in the range of 0.14 to 0.17 per cent. Thus, there is no obvious need for the ECB as a provider of cheap digital retail payments, which would require the parallel holding of digital-euro deposits.

Therefore, the challenge is to establish a European payment system like Paypal, open to different payment objects and instruments. It must offer, in addition to the basic payment transaction, a broad range of services for retailers and consumers, especially for online trade. But running such a comprehensive payment system goes beyond the remit and scope of a central bank.

All in all, the digital-euro project is wrongly conceived. There is neither a need for central-bank deposits limited to a few thousand euro nor a need for a new payment system—based on a digital euro—merely to make cheap digital payments while offering no additional services. If the ECB does not fundamentally rethink the concept, it runs the risk that the digital euro will be a flop. This would do considerable damage to the bank’s reputation.

Successful project

Is there a way out of this impasse? A very successful project is the Pix system, introduced by the Banco de Brazil in 2020. Under it, the central bank provides a settlement system for retail payments which can be used with a wide variety of payment instruments.

The big difference from the digital euro is that with Pix households and companies can use their existing bank deposits as payment objects—there is no need to hold any deposit with the central bank. Therefore, the PIX system does not provide a central-bank digital currency.

To stay with the highway analogy, in Pix, the central bank, together with the banks and other payment service providers, has established an attractive new network which can be used with all kinds of vehicles. A new vehicle developed by the central bank is not required.

As data from the Bank for International Settlements show, it is an impressive success (figure 2): ‘By end-February 2022 (15 months after launch), 114 million individuals, or 67% of the Brazilian adult population, had either made or received a Pix transaction. Moreover, 9.1 million companies have signed up—fully 60% of firms with a relationship in the national financial system.’

Figure 2: usage and market share of the Pix payments system in Brazil

Screenshot 2022 12 18 at 19.05.48
Source: Duarte et al (2022)

In sum, while there is an urgent need to develop a competitive European payment system, the idea that it must be based on a digital euro is fundamentally flawed. The ECB should observe the ‘first law of holes’ conceived by the the one-time British Labour finance minister Denis Healey: when you are in one, stop digging.

This is a joint publication by Social Europe and IPS-Journal

Peter Bofinger
Peter Bofinger

Peter Bofinger is professor of economics at Würzburg University and a former member of the German Council of Economic Experts.

You are here: Home / Economy / The digital euro: a flawed concept doomed to flop

Most Popular Posts

Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse
income inequality,inequality,Gini,1 per cent,elephant chart,elephant Global income inequality: time to revise the elephantBranko Milanovic
Orbán,Hungary,Russia,Putin,sanctions,European Union,EU,European Parliament,commission,funds,funding Time to confront Europe’s rogue state—HungaryStephen Pogány

Most Recent Posts

reality check,EU foreign policy,Russia Russia’s invasion of Ukraine—a reality check for the EUHeidi Mauer, Richard Whitman and Nicholas Wright
permanent EU investment fund,Recovery and Resilience Facility,public investment,RRF Towards a permanent EU investment fundPhilipp Heimberger and Andreas Lichtenberger
sustainability,SDGs,Finland Embedding sustainability in a government programmeJohanna Juselius
social dialogue,social partners Social dialogue must be at the heart of Europe’s futureClaes-Mikael Ståhl
Jacinda Ardern,women,leadership,New Zealand What it means when Jacinda Ardern calls timePeter Davis

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

The EU recovery strategy: a blueprint for a more Social Europe or a house of cards?

This new ETUI paper explores the European Union recovery strategy, with a focus on its potentially transformative aspects vis-à-vis European integration and its implications for the social dimension of the EU’s socio-economic governance. In particular, it reflects on whether the agreed measures provide sufficient safeguards against the spectre of austerity and whether these constitute steps away from treating social and labour policies as mere ‘variables’ of economic growth.


DOWNLOAD HERE

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

Foundation for European Progressive Studies Advertisement

The winter issue of the Progressive Post magazine from FEPS is out!

The sequence of recent catastrophes has thrust new words into our vocabulary—'polycrisis', for example, even 'permacrisis'. These challenges have multiple origins, reinforce each other and cannot be tackled individually. But could they also be opportunities for the EU?

This issue offers compelling analyses on the European health union, multilateralism and international co-operation, the state of the union, political alternatives to the narrative imposed by the right and much more!


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube