Tag Archives: Digital Euro

“Dirk Niepelt on the Political Economy of CBDCs,” Central Banking, 2026

Central Banking, March 25, 2026. HTML. Interview text:

1. A number of central banks are currently working on introducing retail CBDC. In your view, what are the risks they most frequently overlook?

One risk is losing sight of the bigger picture. Retail CBDC is not merely a technological innovation that may or may not help respond efficiently to structural change in the payment system. It can also serve as a tool for broader reform of the monetary architecture. The overarching objective should be to provide liquidity to Main Street at minimum social cost, and the debate about retail CBDC should focus on whether it can help achieve that goal. Instead, the discussion often centers on secondary objectives and insufficiently questions the status quo.

2. The ECB, for example, argues that holding limits will ensure that commercial banks do not feel too much pain from the digital euro as deposit flight will be small. What is your view?

Why would commercial banks’ “pain” be a primary concern for policymakers? Even if it were, the fears around deposit flight are often overstated. Retail CBDC does not remove funds from financial markets—it reallocates them from banks to the central bank, which reinvests the funds. Depending on policy design, retail CBDC may have little or no effect on banks’ funding conditions, and even when it does, this is not necessarily harmful. If policymakers are genuinely concerned about deposit flight, the appropriate tool is remuneration, which directly influences demand. In contrast, holding limits are a blunt instrument: they fragment markets, create incentives to circumvent the restrictions, and can encourage runs into other assets.

3. How should commercial banks prepare for CBDC issuance?

Commercial banks should first consider what societal benefits their money creation provides. If these societal benefits exist and are significant, there is little reason for concern. If, however, bank money creation primarily serves banks or their clients without generating substantial social value, banks should prepare for reduced deposit funding. Even in that case, losing access to deposits or inexpensive substitutes would not spell the end of banking—banks generate value in many other ways.

4. Most central banks are pursuing non-remunerated CBDCs. Is this the right course of action?

No. A retail CBDC that does not pay interest is less attractive as a store of value, making bank deposits relatively more appealing and increasing the payment system’s dependence on fragile, too-big-to-fail banks. It is difficult to justify introducing retail CBDC without allowing it to compete with bank deposits—unless the goal is simply to preserve banks’ money-creation business model, which is not obviously a societal objective. Non-remuneration also reduces retail CBDC’s usefulness as payment instrument, potentially undermining any other objectives that the CBDC is intended to achieve.

5. What is the interplay between the policy choices of holding limits and remuneration?

Remuneration and holding limits influence retail CBDC in fundamentally different ways. Remuneration is a price instrument: by adjusting the interest rate on CBDC, the central bank can influence how much households and firms choose to hold. Holding limits, by contrast, are quantity restrictions applied to individual users. When demand varies across households and firms, these limits create distortions and incentives for circumvention.

6. The post-GFC environment saw plenty of public anger directed at the banking sector, which was seen to have managed to get away “scot-free” thanks to generous QE policies from central banks, with plenty of arguments connecting banking sector bailouts and the “populism”, for lack of a better term, of the 2010s. How would issuing digital public money play into this?

Indeed, there is a view that banks, their staff, or their customers privatize gains while socializing losses. If true, this would amount to large implicit subsidies and distortions. Banks have also been seen to preserve this asymmetry, lobbying policymakers and playing a game of whack-a-mole with regulators. Retail CBDC could offer a new avenue to address this situation. On one hand, it increases transparency in the monetary architecture, fostering accountability and raising public awareness. On the other hand, it acts as a “carrot”—an attractive alternative payment instrument that can draw users away from deposit holdings at fragile banks—replacing the “stick” of regulation, which often lags and carries collateral costs. The success of this strategy depends on making retail CBDC a genuinely appealing substitute for deposits, unlike policies that rely on stringent holding limits and non-remuneration.

7. If central banks found themselves more “politicised” by issuing a CBDC, what policy choices could they make to avoid this perception?

The main risks associated with retail CBDC may indeed lie in the realm of political economy. Its successful introduction would expand the central bank’s balance sheet, likely triggering demands and proposals from policymakers outside the central bank as well as from interest groups. This makes institutional design crucial. The decision to introduce retail CBDC should not rest with the central bank, since the implications extend well beyond monetary and financial stability. At the same time, central banks must retain full operational control over the instruments necessary to fulfill their mandate, particularly price stability. Clear governance arrangements and a well-defined mandate are essential to ensure that retail CBDC does not blur the boundary between monetary policy and fiscal or industrial policy objectives.

8. What are the main academic debates surrounding CBDC? How should central banks think about them?

The literature has addressed “micro” and “macro” dimensions of retail CBDC. The former concern, for example, privacy and its implications for CBDC demand. Macro issues typically relate to banks, financial intermediation, credit, and investment. I find it useful to organize the findings in this macro literature around the core features that make CBDC relevant in the first place. Yet these features have not been emphasized strongly. Rather than focusing on the fundamental sources of CBDC’s macroeconomic relevance, the literature often shows how accompanying policy choices shape its economy-wide implications. These accompanying choices—for example, regarding CBDC remuneration, the regulatory treatment of bank deposits relative to central bank credit facilities, or the design of central bank operating frameworks—are frequently treated as secondary when they are, in fact, decisive. Even slight changes in model assumptions can make results that suggest CBDC is transformative collapse toward neutrality. A key lesson of the literature, therefore, is that accompanying policy choices are of first-order importance for retail CBDC. This underscores that political economy considerations are equally central.

“Central Bank Digital Currency, the Future of Money, and Politics,” VoxEU, 2026

VoxEU, March 6, 2026. HTML.

Ultimately, the macroeconomic significance of CBDC is shaped by policy choices, and political economy determines whether CBDC becomes a significant factor. To understand CBDC policy, don’t just think macro — think political economy.

Conference on “The Macroeconomic Implications of Central Bank Digital Currencies,” CEPR/ECB, 2023

Conference jointly organized by CEPR’s RPN FinTech & Digital Currencies and the European Central Bank. Welcome speech by Piero Cippolone, keynote by Fabio Panetta.

Organizers: Toni Ahnert, Katrin Assenmacher, Massimo Ferrari Minesso, Peter Hoffmann, Arnaud Mehl, Dirk Niepelt.

CEPR’s conference website. ECB’s website with videos. Website with pictures.

“Why the Digital Euro Might be Dead on Arrival,” VoxEU, 2023

With Cyril Monnet. VoxEU, August 10, 2023. HTML.

… promoting the digital euro requires an aggressive marketing strategy because private incentives for adoption are limited. However, the pursuit of such an aggressive approach is unlikely as this runs counter to the ECB’s fourth, implicit objective of protecting banks’ existing business model.

This is problematic and could turn the project into a significant missed opportunity, for the potential social benefits of the digital euro substantially exceed its private ones.

“Der digitale Euro könnte zur Totgeburt werden (Digital Euro, Dead on Arrival?),” NZZ, 2023

Neue Zürcher Zeitung, July 5, 2023. PDF. HTML.

Ein digitaler Euro könnte den Wettbewerb fördern, mehr Transparenz schaffen und das Too-big-to-fail-Problem entschärfen. Mit ihrer Minimalvariante aber priorisiert die EZB das Ziel der Bewahrung des Status quo im Bankensystem.

“Digital Euro: An Assessment of the First Two Progress Reports,” SUERF, 2023

SUERF Policy Brief 612, June 2023. HTML, PDF.

Executive summary:

The ECB’s first two progress reports on the digital euro clarify the project teams’ considerations. Some motivations for a digital euro remain vague, some fundamental tradeoffs receive limited attention. Most importantly, the reports lack an analysis of why digital euro holdings as stores of value are not desirable and whether strategies to limit such holdings cause collateral damage. Against that backdrop some of the design choices backed by the Governing Council appear premature.

“Digital Euro: An Assessment of the First Two Progress Reports,” European Parliament, 2023

European Parliament, April 2023. PDF.

Executive summary:

The two progress reports provide an insightful overview over some of the thinking underlying the digital euro project. The reports remain vague in some respects, which is not surprising given the early stage of the project and the division of tasks between the ECB and the Commission.

The first report suggests that the digital euro can help preserve public money as the anchor of the payment system, but it does not explain how the decline in cash use endangers the anchor role or how a digital euro would mitigate the associated risks. It motivates the digital euro as contributing to Europe’s strategic autonomy, but does not clarify whether the autonomy concerns national security, cheaper payment services, or monetary sovereignty, and why either of these would suggest a focus on consumers rather than business users. More generally, the report discusses few economic motives for a digital euro in depth and this raises doubts about the proper sequencing of design choices. Some arguments for privacy restrictions are not fully convincing. The most important shortcoming of the first report is the lack of analysis of why digital euro holdings as stores of value are not desirable (or why this issue is beyond discussion) and whether strategies to limit such holdings cause collateral damage.

The second report lacks a discussion of incentive compatibility of the envisioned public-private partnership model. It also lacks detail on the proposed settlement, funding and defunding models and on the incidence of the payment scheme’s costs.

The reports do not discuss implications for central bank balance sheets, interest rates, political interference, and the ECB’s mandate to introduce a digital euro.

My colleague Cyril Monnet also wrote a report (PDF). His executive summary:

Since Facebook’s announcement of Libra in July 2019, central banks, including the European Central Bank (ECB), have accelerated investigations on the introduction of their own retail digital currency.

This study analyses the two reports published by the ECB regarding its investigation for the introduction of a digital euro.

The digital euro can offer many advantages over existing means of payment. However, most of these benefits, as outlined in the two reports, are of a systemic and social nature, rather than being benefits for users.

A broad acceptance and usage of the digital euro requires that it brings benefits not only to consumers but also to merchants. The digital euro needs a platform business model that brings consumers but also incentivises merchants to adopt it.

In addition, considering the social benefits it brings, the ECB should design the digital euro to promote its appeal. The ECB should consider eliminating holding limits and discontinuing penalising remuneration schemes as soon as possible after its introduction. Also, the ECB should consider adding some programmability features to the digital euro.

There are also some challenges ahead.

The deployment of the digital euro by regulated intermediaries results in a conflict of interest, as the digital euro competes with a significant source of their revenue, i.e. payments. To restrict the fees charged to users of the digital euro by intermediaries, the ECB should consider implementing a transparent fee structure that may incorporate subsidies.

Also, while consumers use cash to preserve their anonymity, the digital euro will always leave a data trail. It is therefore key that the future design of the digital euro preserves at least the privacy of its users, which may require the central bank to make compromises with some other objectives.

It is not clear that distributed ledger technology (DLT) is the best way to deploy the digital euro but making it DLT compatible and programmable can foster innovations in decentralised finance.

Update, late May 2023: Christian Hofmann also wrote a report (PDF). His executive summary:

… This paper argues that the paramount reason for introducing a digital euro should lie in the imperfections of the existing money landscape that offers the public suboptimal choices for store of value and payment transactions. In that respect, the introduction of a digital euro holds great promise for the public, and this paper focuses on one of the most essential design features of a digital euro. The European Central Bank (ECB) plans to introduce a limited version of a digital euro that would cap the maximum amounts of digital euros that individuals can hold, but this paper challenges the ECB’s assumption that such caps are needed in the interest of financial stability. The concerns voiced by the ECB and other central banks about the risks from sudden outflows of liquidity from bank deposits to CBDC are realistic, but this paper argues that these risks are manageable and that a digital euro might even support financial stability in a banking crisis. Properly implemented, an unlimited digital euro would allow central banks and other authorities to wield control more effectively during bank run scenarios and improve their overall ability to manage crises situations. 

Fabio Panetta on the Digital Euro

In a speech, the ECB’s Fabio Panetta argues that a digital Euro is necessary because

[i]n the digital age … banknotes could lose their role as a reference value in payments, undermining the integrity of the monetary system. Central banks must therefore consider how to ensure that their money can remain a payments anchor in a digital world.

He argues that

outsourcing the provision of central bank money [to stable coin providers] … would endanger monetary sovereignty [as would the absence of a national digital currency].

Panetta also argues that a digital Euro could

  • improve the confidentiality of digital payments and
  • increase choice and reduce costs

and should

  • avoid interfering with the functioning of the financial system and
  • be available within private payment solutions.

Panetta does not discuss

  • seignorage and
  • time consistency motivations.

German Banks Send Mixed Signals on Digital Euro

In the FAZ, Christian Siedenbiedel reports that Deutsche Bank questions whether a digital Euro as envisioned by the ECB (i.e., with tight quantity restrictions) would be successful:

Die Argumentation geht so: Die EZB will den digitalen Euro einführen, um auf den verstärkten Währungswettbewerb zu antworten. … Um sich vor solchem Machtverlust sowohl durch Digitalgeld von anderen Notenbanken („Krypto-Dollars“) als auch durch privates Digitalgeld („Global Stable Coins“) zu schützen, treibe die EZB den Digitaleuro voran. Also aus längerfristigen politischen Motiven. Dabei sei unklar, ob der digitale Euro sich international am Markt durchsetzen könne und ob die Menschen in der Eurozone dafür überhaupt Bedarf hätten. “Das Design des digitalen Euros, soweit bisher bekannt, lässt erwarten, dass die potentiellen Nutzer kaum einen Unterschied zu bestehenden Bezahloptionen erkennen werden”.

Update: From the dbresearch document prepared by Heike Mai:

Lifting the limits on how much each user can hold would change the situation entirely, allowing a massive outflow of bank deposits into the digital euro. As a result, lending decisions and money creation would shift from the decentralised, privately owned banking sector to a central, state-run authority: the ECB. In this case, Europe would face the fundamental question of which type of monetary and financial system it wants. The answer to that would have to come from democratically elected representatives.

The German Banking Industry Committee sees a central role for the digital Euro, however, according to a new paper:

In a policy paper, the German Banking Industry Committee (GBIC) for the first time sets out detailed thoughts on the design of a “digital euro”. In this paper, experts from Germany’s five national banking associations draw up an ecosystem of innovative forms of money that extends far beyond the idea of digitalised central bank money, which is referred to as Central Bank Digital Currency (CBDC). The ECB will probably launch the project for a digital euro in mid-July 2021.

“To be successful, the digital euro must do three things: It must be as easy for consumers to handle as cash. It must be viable in the long term for business enterprises, e.g. for automated machine-to-machine payments. And the digital euro must be well embedded in our delicately balanced, carefully secured and highly regulated European financial system because this system guarantees safe and fair access to financial and banking services for everyone in Europe”, notes Dr Joachim Schmalzl, executive member of the Board of Management of the German Savings Bank Association (DSGV), which is currently the lead coordinator for the German Banking Industry Committee.

In the opinion of the experts from Germany’s five national banking associations, issuing money should remain the responsibility of credit institutions in the proven two-tier banking system [my emphasis], even if the digital euro becomes legal tender like cash. For this reason, the ecosystem of digital money which they propose is made up of three key elements:

  • retail CBDC for private use
  • wholesale CBDC for commercial and savings banks
  • tokenised commercial bank money for use in industry

Retail CBDC issued by the central bank is to be used by private individuals in the euro area in the same way as cash for everyday payments, e.g. to retailers or government agencies. It should be possible to use the digital euro like cash, anonymously and offline. For this purpose, credit institutions will provide consumers in Europe with “CBDC wallets”, i.e. electronic wallets.

Wholesale CBDC issued by the central bank is to be used for the capital markets and interbank transfers. The GBIC’s experts are calling for this special form of the digital euro partly because, by adopting this approach, the ECB would be able to include further digitalisation of central bank accounts in its project. The ultimate aim is to achieve improvements which can benefit consumers, enterprises and also the banking sector.

Tokenised commercial bank money, which will be made available by commercial and savings banks, is to complement the two forms of digital central bank money, in particular to meet corporate demand arising from Industry 4.0 and the Internet of Things. Tokenised commercial bank money could facilitate transactions based on “smart” – i.e. automated – contracts and thus increase process efficiency.

“Increasing process digitalisation and automation will provide completely new opportunities for Europe’s enterprises. The banking sector is ready to provide new solutions for its corporate customers by issuing innovative forms of money. The ECB must define the necessary framework that will enable Europe’s banking sector and real economy to make reasonable use of the new opportunities”, Joachim Schmalzl observed on behalf of the GBIC.

I share the skepticism of DB research. And I can understand that banks prefer to maintain the two-tiered system while pushing for broader and more efficient payment options for their business clients.