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Digital Euro as currently planned is ‘bound to fail’, warns economist

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While most EU policymakers are focussing on the risks posed by the Digital Euro, economy Professor Dirk Niepelt warns that too many restrictions might mean it cannot fulfil its role as an attractive public alternative to private payment providers.

In June this year, the European Commission proposed a Digital Euro regulation to set the legal boundaries for introducing a digital currency, issued by the European Central Bank (ECB) and pegged 1:1 to the regular euro.

While the regulation must be approved by EU member states and the European Parliament, most of the technical work is being done by the ECB.

“The ECB protects the business model of banks,” Niepelt told EURACTIV in an interview, arguing that “the Digital Euro as it is planned now is bound to fail as private solutions are simply more attractive.”

Mitigate “Too big to fail” risks.

While both the ECB and the European Commission say the Digital Euro might be needed to provide for central bank money in the digital space and thus ensure European monetary sovereignty despite the technological change, Niepelt from the University of Bern worries that this might be undermined by the institutions’ overarching desire not to upset the system.

According to him, a well-designed Digital Euro could increase competition for banks and decrease dependency on foreign providers and the “too big to fail” risks of European banks.

“Many problems could be tackled rather elegantly without cumbersome regulation,” Niepelt told EURACTIV, arguing that a Digital Euro could help to stabilise the financial system.

“Part of the too big to fail problem is the fact that today’s payment system mainly relies on banks,” he said. If banks become less essential to the payment system, the damage of bank failure would be more limited.

Holding limits and a ban on paying interest

But for this to be possible, the Digital Euro must be widely adopted and thus attractive for users compared to today’s private payment systems. According to Niepelt, however, the current proposal for the Digital Euro undermines its attractiveness.

For example, the EU Commission’s legislative proposal, as well as the ECB studies on the Digital Euro, foresee holding limits for users to prevent a destabilising outflow of bank deposits into Digital Euro accounts.

Niepelt believes that these limits make the Digital Euro unattractive. “Holding limits could maybe make sense at the beginning, but not permanently,” he told EURACTIV.

He does not believe that the banks have a reason to fear a massive outflow of bank deposits into Digital Euro holdings, saying that most people did not know the difference between central bank money and bank deposits.

A second point that the monetary policy expert Niepelt criticises is the fact that no interest may be paid on Digital Euros, which makes the Digital Euro less attractive than bank deposits and also deprives the ECB of a way to improve its monetary policy toolbox that currently suffers from a very slow transmission process.

“Monetary Policy could act much more directly through a Digital Euro, but the decision to ban interest rates on Digital Euros severely restricts these options,” Niepelt said.

For payments only

Meanwhile, Christian Stiefm?ller, a senior policy advisor at the financial policy NGO Finance Watch, thinks that both the holding limits and the ban on paying interests have legitimacy.

“Holding limits and the ban on paying interest are instruments that help the Digital Euro fulfil its intended role as a new, public means of payment,” he told EURACTIV.

According to Stiefm?ller, the question of holding limits and paying interest would be “relevant only if we look at the Digital Euro as a potential repository for citizens’ savings.”

But, the Commission and the ECB are adamant that they do not foresee the Digital Euro as a store of value, stressing its purpose as a means of payment instead.

Don’t upset the system

However, Stiefm?ller strikes a similar note as Niepelt in his analysis of how the current proposal considers the interests of the financial industry.

“[The proposal] goes out of its way to involve the financial industry – banks, payment firms, and Fintechs – in distributing and handling the Digital Euro. It also goes to great lengths to preserve deposits as a source of funding for banks and so protect the stability of the banking system,” Stiefm?ller said.

The rather conservative approach by the EU institutions could also be observed in a meeting of the economic committee of the European Parliament on Monday (4 September), when most MEPs primarily voiced concerns over the Digital Euro.

Talking to EURACTIV, the European Parliament’s rapporteur on the Digital Euro file, German Christian Democrat Stefan Berger, also sounded cautious.

“We need to succeed at introducing the digital euro without upsetting the current system,” he said.

[Edited by Alice Taylor]

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