3 - 4 minute read
A paper produced for the European Parliament argues that a digital euro system shouldn’t limit users’ holdings, and that the risks to financial stability of people deserting conventional banks are overstated. This goes against central bankers’ conventional wisdom that individuals shouldn’t be allowed more than a few thousand euros worth of the central bank digital currency (CBDC) to prevent them from using it as a savings vehicle.
According to the report produced by academic Christian Hofmann at the request of the European Parliament’s Economic and Monetary Affairs Committee, “The key role of a digital euro consists of the important role it can play as a store of value option for the public. All of this requires that the public’s access to a digital euro is unlimited.” Hofmann argues that the goals for the project set out by the European Central Bank’s Fabio Panetta are wrong. Panetta wants the CBDC only used for day-to-day payments and has limited individual users of the putative currency to holding around €3,000 at a time.
Some lawmakers are thinking on similar lines, with socialist Dutch lawmaker Paul Tang stating in an April 19 debate that he has “strong doubts about the restrictions” on holdings and that the CBDC should compete with banks. Central bankers such as Panetta have warned that a mass exodus from commercial banks could choke lending to the economy and damage financial stability.
The ECB is due to decide later this year whether to continue with the digital euro project, and the Bank of England has said that holdings of its own digital pound could also be limited to £10,000.
The report argues that a digital euro system with unlimited access could play an important role as a store of value option for the public. However, there is a risk that if people were to desert conventional banks en masse, this could choke lending to the economy and damage financial stability, which is a concern for central bankers.
Traders need to keep an eye on the ECB’s decision later this year on whether to continue with the digital euro project, as this will have implications for the future of the euro and the wider economy. If the digital euro is approved, it could offer an attractive alternative to commercial banks, but there will need to be safeguards in place to ensure that the economy is not negatively impacted.
The Bottom Line
The debate over whether to limit holdings of the digital euro continues, with lawmakers and academics arguing that unlimited access is crucial to the success of the project. Traders should keep an eye on the ECB’s decision later this year on whether to continue with the digital euro project, as this will have implications for the future of the euro and the wider economy.
