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Payments experts and European lawmakers appeared unsure on how a digital euro could benefit the eurozone in a public hearing this week.
Parliamentarians on the Economic and Monetary Affairs (ECON) Committee this week held a public hearing on the digital euro.
Considering the proposal for the digital euro’s legislative tools were published in June, the ECON committee’s position on the EU’s central bank digital currency (CBDC) will hold weight in the final decisions made on the payments shake-up.
During the hearing, Ignazio Angeloni, a professor and former official at the European Central Bank (ECB), acknowledged that the entry of fintech into the payments sector has changed the playing field.
However, he commented that this “doesn’t necessarily imply a digital euro is a good idea”.
“The arguments in balance, today, would not favour such a view,” he said. “However, the ECB plans several years of work before a decision is made.”
Among his points, Angeloni threw cold water on the notion that cash as a payment method is going anywhere.
“The demise of cash is a myth,” he said. “In the 22 years of its existence, euro banknotes have increased steadily in value.”
“Countries where cash is shrinking, like Norway or Sweden, are exceptions to the rule,” he said.
Instead, what is really diminishing is the use of cash for certain transactions, the academic said, saying that this should be seen as a credit to the retail payments system in the EU.
Angeloni said that this is far more user-friendly than that of other jurisdictions like the US.
“A CBDC, which is a carbon copy of facilities already existing, would hardly contribute in a significant way.”
Angeloni also said that despite a high market share, Visa and Mastercard’s dominance is far from established.
He pointed to Germany and Italy as examples of where there are strong local alternatives, saying that this makes it “doubtful” of whether policy intervention is needed.
The case for CBDCs
Further, Angeloni warned that CBDCs in other jurisdictions have not been widely used.
“In China, the Bahamas, and Nigeria, CBDCs have not been very successful for the moment,” he said. “Two or three years after its launch, the Chinese CBDC is little used in spite of the multiple means of pressure that are available to the Chinese government to promote its success.”
Angeloni’s arguments were welcomed by right-wing member of the European Parliament Michiel Hoogeveen, who has garnered praise from market participants for his negotiation of the Instant Payments Regulation.
“On strategic autonomy, we already have the Instant Payments Regulation, we already have the European Payments Initiative,” he said. “It shows that Europe is a place for innovation and we can set up our own payment systems, so I think that the digital euro is not very relevant in that case.
He further commented that the financial inclusion benefits of a digital euro are a “non-argument”.
Digital euro: a crisis safeguard?
Meanwhile, former Banco de España chief Miguel Ángel Fernández Ordóñez was more positive and suggested that a CBDC could solve current problems that the EU’s financial system has with bank deposits.
“But to understand this, we need to understand problems in the current system, and that’s not straightforward because we tend to think that what we have is natural and we don’t really analyse the costs of maintaining the current system,” he said.
A digital euro could bring stability, the central bank governor suggested. “The digital euro would put an end to the problem of bank crises, these destructive events that undermine the payments system,” he argued.
“Over the last hundred years, we have had two major global crises, and about 200 national systemic crises. These crises arose because we were using an at risk, financial asset, i.e. deposits,” he said.
According to Fernández Ordóñez, who is also a member of the Spanish Socialist Workers Party, such crises would not happen with a digital euro “because it is a safe asset”.
“Deposits are promises to pay back money, and if banks can’t fulfil these promises then you can get crises emerging,” he said.
He also suggested that the digital euro could be used to deregulate the banking industry. “That deregulation would have a very important impact on growth because banking is the most protected sector.”
The banking industry has had to deal with “suffocating regulation like Basel III”, the economist said.
“This doesn’t apply to any other economic sector. If you look at the amount of regulation we have, it is the equivalent to about two Bibles worth.”
The former governor’s argument came up against scepticism from the digital euro legislation’s rapporteur, Stefan Berger, who said “isn’t rather the case that the ECB would become a monopoly actor?”.
“If there is to be a shift in favour of the ECB, and private banking systems end up being reduced in their dimensions, then how will that affect the granting of loans and credit to the economy as a whole?”
He also questioned whether there should be infinite holding limits for a digital euro, suggesting that this could damage the banking system.
The public hearing, according to Berger, a German MEP, reveals that “we live in a digital world, where the future is likely to be more digital than we can ever imagine”.
His colleague, the centre-left MEP Paul Tang, commented that the digital euro has advantages. For example, he argued that it is “a safe asset” and “will enforce European strategic autonomy”.
Tang warned that the eurozone faces risks from being undermined by stablecoins if it fails to modernise.
Despite its demise some time ago, the Dutch MEP referenced Facebook (now Meta) and its Libra (then Diem) project as a reason to create a digital euro.
Meanwhile, MEP Eva-Maria Poptcheva was sceptical about Fernández Ordóñez' argument, saying that it fails to take into account that there will be “two parallel” systems for payment accounts for sometime after the issuance of a digital euro.
For this reason, the centrist MEP said that limits on how much of the digital euro can be held by citizens would need to be in place.
This was echoed by Green MEP Henrike Hahn, who questioned Fernández Ordóñez on whether he would advocate a “big bang” for the digital euro or a “step by step approach, building on the needed network effects”.
Here, the central bank governor did confirm that he felt that there should be limits at the beginning. “We should make it clear that we will gradually remove that barrier and, in addition, we will remove the current protection that banks have.”
