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Monday, September 20, 2021

ECB will introduce the “digital euro” soon : When and Why?

The electronic euro is coming. The currency is already digital, but with the e-euro the ECB could control the consumption behaviour of savers.

Digital Euro – that’s what it’s supposed to be called. A pilot project is expected to start in the summer, the actual introduction is planned for 2026. At first glance, the project looks quite attractive: in the future, every citizen of the Eurozone will get a wallet, i.e. an electronic purse. There are then digital euros that can be used to pay just like cash.
The advantage would be that e-euros would not be the liabilities of a private bank, but those of the ECB. While a commercial bank can go bust – see Lehman Brothers – that is hardly conceivable for a central bank. And in contrast to Bitcoin and Co, the digital euro would be accepted as a means of payment everywhere. The ECB is promoting the project by saying that paying would be easier and an e-euro would force the transition of the old continent into the digital age.

On closer inspection, however, the euro is already available in digital form: Consumers can pay almost anywhere with debit and credit cards or PayPal and mobile phones. All of this happens digitally and is very easy. These payments also work internationally and in different currencies. As a reminder: at the beginning of 1999, the euro was only available in a digital form as a billing unit, coins and bills did not appear until 2002.
So what motivates the ECB to want to introduce the digital euro? First, cryptocurrencies are a thorn in the side of the currency authorities. Because Bitcoin and Co elude their influence. With them there are to a certain extent parallel currencies with a life of their own. The central banks can hardly tolerate that, because they claim that they are the only ones to influence and control the currencies. But direct access is no longer possible. At the same time, the ECB would like to expand its influence. Because their monetary policy instruments have largely been exhausted. Banks that park money with the ECB are already paying penalty interest, and the central bank will buy bonds totalling 1.85 trillion euros by the end of March next year. This means that the ECB has reached its limits. New instruments would come in very handy.
So far it has been said that there should be no interest with the digital euro and therefore no negative penalty interest. But who would have thought just a few years ago that the ECB would one day charge fines for deposits from commercial banks? With negative interest rates on the digital euro, the monetary authorities could directly stimulate consumer demand. Obviously, this will not succeed with negative key interest rates. From January 2020 to January 2021, according to the Deutsche Bundesbank, the bank deposits of private households in Germany rose by 182 billion to 1.73 trillion euros.


It is at least doubtful whether the money that has been saved beyond the normal amount in the past few months will actually be consumed once the Corona crisis has been overcome. On the one hand, the consumer spending that has failed since the beginning of the crisis can in some cases no longer be made up. On the other hand, many consumers are likely to experience a greater degree of uncertainty. If the job is not perceived as secure, the euro is unlikely to be particularly relaxed.

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With the digital euro, however, the ECB could directly control consumer propensity to consume and thus the development of the economy. And she would regain sovereignty over the euro. The ECB is by no means the only central bank working on a digital currency. The Swedish Reichsbank wanted to introduce the e-krona in 2018. However, technical difficulties mean that the test phase will initially be extended until 2026. And in China, the first test with e-yuan has been running for a good year. As early as next year there should be digital central bank money at the Olympic Winter Games. Beautiful new world.

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