CBDC, ECB, economics – the digital euro from an economic perspective

Mr. Groß, does the eurozone need its own digital central bank money?

I would certainly welcome a decision in favour of this. Because a digital euro – which basically imitates cash – would offer many advantages. One of these advantages would be more privacy for online transactions. Today, we use scriptural money for this purpose, which is why banks, credit card providers and payment services always have insight into customer data. With a digital euro, if designed appropriately, data control would remain with the respective users. What’s more, a CBDC can promote innovation, especially in the Internet of Things. I always like to refer to the example of a car which has its own digital wallet and uses CBDC to automatically pay for fuel, tolls or rent.

The Frankfurt School Blockchain Center attests that the digital euro could strengthen the geopolitical role of our currency. How?

With any currency, the first question is who uses it? In the case of euro cash, this is primarily people from the eurozone countries. With a CBDC, the circle could expand considerably – just one click and the euro could be sent to any country. A European export company that has so far tended to use the currencies of foreign counterparts for business could now offer these companies access to the digital euro and thus spread it worldwide. And that in turn would strengthen its importance geopolitically. However, this scenario is not necessarily realistic at present.

Why?

The ECB would have to endorse and ultimately support such a process. And it noted in 2020 that it does not want to make the digital euro available to foreign countries without any limits. Especially because it is reluctant to intervene in exchange rates and capital flows. This means that the main users would be eurozone citizens, while people in third countries – but this has not yet been clearly defined – would at best have partial access. The question now is whether other central banks could pursue an alternative strategy here that relies on a broad opening to foreign countries. The Federal Reserve, for instance, seems more likely to take the same stance as the ECB. In the US, however, CBDC is currently even more of a pipe dream than in Europe. In terms of timing, the US lags about a year and a half behind, probably also because the dollar is very dominant compared to cryptocurrencies and stablecoins. It will be exciting to see how things play out in China, where the digital yuan is likely to be a reality throughout the country very soon. I believe that the probability of a currency being opened is higher here.

In other words, it is questionable whether the euro will become stronger on a global scale. The ECB, on the other hand, is definitely likely to become more important, isn’t it?

Yes, up to a certain point, definitely. When we pay digitally today, i.e., using credit cards or payment services, we are not actually using a digital currency. All we are doing is moving money from our own accounts, which are with commercial banks. The digital euro, on the other hand, comes directly from the ECB. The advantage of this is that consumers are less dependent on their banks and therefore better protected should a bank go bankrupt. In any case, a central bank cannot go bankrupt since it can simply put new money into circulation. And of course, this would automatically give the ECB more power, not least when it comes to monetary policy.

But wouldn't that automatically threaten commercial banks?

I don’t think the ECB would have too much power. For them, the digital euro would primarily promote innovation and compensate for cash, which is becoming less and less important. At present, the ECB is talking a lot about limits and wants to protect the financial sector. What is to be prevented is a run on the banks, with people emptying their accounts and exchanging the money for the safe CBDC. Instead, the European Central Bank’s policy would be one where users are only allowed to hold a certain amount of money as CBDC. There is even talk of a negative interest rate on the digital currency, which would take effect above a certain threshold. I believe that banks will continue to be the main place to save money. They would certainly perform important functions in the CBDC system too, i.e., setting up accounts, handling user interaction and performing money laundering checks. And one other very important aspect: commercial banks would continue to lend. This is not a task for the ECB.

For a long time, it was thought that cryptocurrencies could provide protection against inflation. Why exactly was that?

Those who want to avoid inflation invest in assets that tend to be rather independent of the monetary system. The best examples of this are real estate and gold. With gold, scarcity plays a huge role in terms of its value. Bitcoin is even scarcer – which, as you know, is also regulated in the code. That’s why it is in my opinion rightly seen as a kind of digital gold.

But the hopes of inflation protection have not necessarily been confirmed ...

I would disagree. Although bitcoin did fall considerably at the beginning of the Covid pandemic and the Ukraine crisis, this was also true for almost all assets, with the exception of gold, and this drop was followed by a strong recovery in both cases. Of course, we shouldn’t jump to conclusions. After all, we are moving towards inflation for the first time in many years and there is no room for absolute truths yet. But I do think that with a view to their protective effect it would be wrong to write cryptocurrencies off completely.

How would things look with digital central bank money?

Basically, it would fare just like our euro today. A CBDC would not be a new, alternative currency, but instead a digital form of cash. The euro would remain the currency and CBDC could always be exchanged for cash. This also means it would lose value just like cash. But that is not a bad thing. A digital euro still makes sense. For competitiveness reasons alone, because otherwise the digital currencies of other countries would become attractive for European companies.

At present, the ECB has no plans to make a possible CBDC venture accessible in third countries. What if a eurozone state disagrees with this? Could this state then launch its own digital currency or cryptocurrency? 

This is indeed an exciting question, also from a legal point of view. In 2020, Lithuania introduced the blockchain-based LBCoin. However, it is more of a digital coin for collectors, a small experimental project. However, I can’t imagine a national central bank from the eurozone launching a real CBDC. The ECB has a considerable say in this and is certainly not keen for countries to go it alone.

Cryptocurrencies are one of the big trends of our time. But they seem to clash with the sustainability megatrend. The energy consumed by cryptocurrency mining is still extremely high. Does this problem also apply to a CBDC?

In terms of sustainability, CBDC doesn’t pose any problems at all. A cryptocurrency consumes so much energy mainly because a network of countless computers in the background uses mathematical-cryptographic methods to create trust. The digital euro is different. In this case, it is the ECB as an institution that creates trust and manages the system. No mathematical puzzles required. A digital euro will consume the same amount of electricity as any banking transaction today.