The Centre for Economic Policy Research (CEPR) published an article by two Bern University professors entitled “Why the digital euro might be dead on arrival”. They argue that contrary to the three stated purposes of the European central bank digital currency (CBDC), there is a fourth implicit and dominant objective: to maintain the banking status quo.
This goal derives from a desire to maintain financial stability and means the design includes restrictive digital currency holding limits.
The authors highlight the conflict of interest for banks that are required to act as intermediaries when they have “no interest in seeing the digital euro alive and well”. However, they don’t mention the bigger conflict for the European Central Bank (ECB) that becomes both supervisor and competitor.
Unrelated to the banking issue, they point out that consumers prefer “cash payments for privacy reasons and card payments for the convenience” and the digital euro is likely to be sub par on both counts.
Given these weaknesses, the holding limits and bank ambivalence, the professors argue that the digital euro needs an aggressive marketing strategy which is unlikely given this runs counter to the fourth implicit objective.
We’re not so sure about this last point. There hasn’t yet been a decision to launch a digital euro and we’ve already seen digital euro promotions on social media.
The authors believe a compromised digital euro would be a lost opportunity as they see potential societal benefits, including one of the stated objectives of enhancing payment competition. They also envision a digital euro as a path to reducing the dependence on fractional reserve banking and too-big-to-fail banks. But it’s unclear how they would address the instability of a rapid transition.
Our view is that many believe the current design of a digital euro is the initial one. Changing holding limits is unlikely to be a technically tricky thing to do.
At the same time, central bankers such as the Banque de France’s François Villeroy de Galhau have gone out of their way to dispel banker fears about the CBDC.