3 February 2023
The European Central Bank, together with its equivalents in the United Kingdom, the United States, China, as well as India, is investigating the feasibility of a new form of state-backed money based on the same distributed ledger technology as Cryptocurrencies like Bitcoin and Ethereum. CBDCs imagine a world wherein we all carry around digital wallets and can instantly transfer funds between them using blockchain technology instead of traditional financial institutions like banks. However, CBDCs also provide a chance to drastically cut down on the excessive amounts of public debt that are stifling several nations, but this possibility has been overlooked so far.
What is a Digital Euro?
The CBDC of the Eurozone will eventually be the digital euro. It's intended to function similarly to Cryptocurrency or digital money, although with a few key differences. The digital euro is essentially a digital money which will have legal significance assured by the ECB, may be utilized with notes to accept transactions in the 19 nations in the Eurozone, and would offer a rapid, safe, and creative payment system that could be utilized by both enterprises as well as individual consumers.
Why Might Europe Need a Digital Euro?
As the need for reliable online transactions grows, the government is considering establishing a CBDC. The reliability of the payment and monetary systems would be strengthened by the issuance of digital money by the central bank. In addition to bolstering monetary sovereignty in the Eurozone, a digitized Euro would increase efficiency and competitiveness in the European payment service.
CBDCs propose that central banks offer digital wallets to people and businesses that may be used for making purchases, making tax payments, and purchasing stocks and bonds. Unlike conventional bank accounts, from which clients may be prevented from withdrawing funds in the event of a bank run, CBDCs would have sufficient reserves to cover all deposits in full. While modern retail banks are not obligated to preserve a large amount of their deposits as reserves, they are nonetheless expected to do so as a precaution in the event that their loan portfolios experience difficulties. When a financial institution in the Eurozone has a capitalization of €1 billion or £852 million, for instance, its loan book must also not surpass €6.6 billion or 6.6 times deposits.
What If the EU Doesn’t Issue a Digital Euro?
This progression toward CBDCs is far along in their development stage. Although there are indications of increased competition in the market, growth in this area is continuing unabated. As a result, it is crucial that the EU be prepared for this brand-new possibility. To maintain independence over EU-wide financial flows in this new context, a digital Euro is essential. The nations of the Eurozone will also gain more 'monetary sovereignty' compared to the United States or any other country. Whether or if the European Central Bank (ECB) should launch a virtual version of the euro is, however, moot. More interesting is how the ECB plans to strategically implement virtual money. Not only does the functionality of a currency and the faith consumers have in the currency contribute to its worth, but also the value of a national market. Both the long-term worth of the currencies as well as its openness to the public have an impact on people's willingness to part with their money. ECB attention in transaction regulation is shown by the central bank's rejection of a blockchain-based coin. It's important to remember, meanwhile, that exercising too much authority more than an electronic currency is likely to make many people wary of using it. EU stability may be extended into the new global digital currency arena if the bloc finds a happy medium between, on the one hand, control over its financial policies and, on the other, a stable digital currency with high features. The Euro's worldwide standing could improve as a result of this.
The Debt Benefit
The worldwide monetary collapse of 2007–2009, the eurozone crisis of the 2010s, and the COVID epidemic are the primary causes of the high amounts of public debt in many nations. In the Eurozone, nations like Belgium (100%), France (99%), Spain (96%), Portugal (119%), Italy (133%), and Greece (174%) have very high debt levels relative to GDP. A solution to large debt is to generate significant rising prices, reducing the debt value but also making populations poorer and perhaps sparking rebellion. Yet authorities may take a different path now that they have the opportunity to take advantage of the switch to CBDCs by altering the regulations governing retail bank reserves. The chance arises mostly during the transition period when the procedure of producing currency to purchase bonds may be reversed, hence resulting in a threefold increase in actual industry GDP. By purchasing bonds using today's euros, the central bank effectively removes 3 euros from circulation for everyone it keeps out.
After the US dollar, the euro is now the second most traded currency. The rising acceptance of the euro may be partly attributed to nations' efforts to lessen their reliance on the US currency. As virtual currencies gain popularity, they pose a danger to the EU's efforts to achieve this goal. If the European Union is serious about maintaining its financial independence and preventing a competing digital currency or it is owned by a non-European government or a large tech corporation from becoming prominent in Europe, it must develop a virtual version of the euro. Even more importantly, the EU has to do this to keep and expand its power.
Disclaimer: The author’s thoughts and comments are solely for educational reasons and informative purposes only. They do not represent financial, investment, or other advice.