Expansionist dreams threaten the digital euro

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Expansionist dreams threaten the digital euro

The Eurogroup wants to go beyond the ECB, and that crypto could be used throughout the world, and not only in the EU

The European Central Bank seems to have decided that if anyone is going to cash in crypto and the euro, it should be the European Union itself. But developing a digital version of the world’s second-largest reserve currency carries risks for the technocrats tasked with maintaining financial stability. The meeting last Monday of the economy ministers of the euro zone, Eurogroup, indicates that the ECB will have them in its sights.

The Eurogroup calls for political supervision and an international approach to the potential digital currency of the ECB. Eurogroup President Paschal Donohoe says determining a digital future for the euro is essential for economic sovereignty. The European Commission must propose the relevant legislation in the first half of 2023.

The ECB is likely to decide in October whether the project goes ahead. Technical work is already well advanced. The agency published its second situation report in December. Amazon, Worldline (of French origin), CaixaBank, EPI (European Payments Initiative, an ECB project that aims to compete with Visa and MasterCard) and the Italian Nexi have been selected to develop prototype systems.

The US Treasury and Federal Reserve are doing similar technical work, although they have made it clear that they see no need to move forward now. The G20 and G7 are working on global standards. The electronic yuan already circulates in China.

A euro version of a central bank digital currency (CBDC) has been on the ECB’s radar since 2019, when Facebook proposed a crypto asset called Libra that sought to take advantage of the credibility of the rate fixer by pegging its value to a basket of existing currencies.

Libra was eventually shut down due to regulatory scrutiny, amid fears it could encourage money laundering and compromise financial stability. The idea of ​​a digital euro with the same reserves as its physical equivalent has to do, in part, with the control of the process by Frankfurt. But it is also conceived as “an emblem of the ongoing European integration process,” according to a 2020 ECB report.

At best, a digital euro could attract more citizens to the banking system, especially those who do not have enough money for traditional financial services products. It could offer a trusted forum for everyday activities like tipping and peddling. But it could also encourage citizens to empty their bank accounts and jeopardize their own savings, as well as the banking system. That is one of the reasons why the United States and the United Kingdom do not welcome the idea. In the EU, meanwhile, concerns from countries like Austria have focused on privacy risks.

The ECB is well aware of these dangers. Fabio Panetta, member of its Executive Committee and head of the project, has stated that the digital euro should be a means of payment, but not a store of value, so it is necessary to limit holdings and the volume of payments.

The ECB’s main function would be the settlement of transactions: it would have no visibility over individual accounts. Instead, customers would go to their bank or other conventional financial provider.

Economy ministers want to go further. Although in their statement on Monday they agreed with the ECB on the need to preserve the privacy of citizens and limit the size of transactions, they also advocated that the ECB allow the international use of the digital euro. This clashes with the preference of central bankers to limit the digital euro to the EU at first.

The euro does not need a digital currency, but its members have said they want one. The ECB’s job now is to make sure it does no harm. For this it is necessary that the expansionist politicians return to their lane.

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Brian Adam
Professional Blogger, V logger, traveler and explorer of new horizons.