A digital euro may not be the solution to the European Central Bank’s (ECB) problems, according to an analytical paper released by the European Parliament.
The report, titled “Digital Euro: When in doubt, abstain (but be prepared),” looked at ten issues a potential digital euro (PDE) would face, focusing on the downsides.
Ignazio Angeloni, the economist who wrote the paper, argued that a digital euro would create competition between the ECB and commercial banks for deposits while requiring the banks to provide frontend services to digital euro users under an intermediated model.
He stated that the intermediated model “generates potentially adverse incentives and warrants a well-designed compensation structure for the services provided by banks. The ECB reports give no information on this.”
According to Angeloni, the introduction of a digital euro could disrupt the banking system if not properly managed.
The digital currency would have to be attractive enough to find a customer base but not so appealing that it undermines the banking system. Furthermore, if the digital euro paid interest, it would have to be managed separately from cash interest rates, which could encourage arbitrage operations.
Angeloni concluded the paper with a quote from Christopher Waller, a governor on the United States Federal Reserve Board, who called central bank digital currency “a solution in search of a problem.”
Angeloni recommended that the ECB should continue exploring the digital euro but should not launch it unless new elements emerge in the future.
The ECB will decide in October whether to continue its research on a central bank digital currency with a “realization phase.” Angeloni’s paper raises concerns about the viability of the digital euro and the need for a comprehensive plan that addresses its potential downsides.
Eurpoean Parliament Digital Euro
While a digital euro has the potential to offer benefits such as increased efficiency and security, it also presents challenges that require careful consideration. The ECB must work to ensure that a digital euro complements the existing financial system rather than disrupting it.