European Parliament, April 2023. PDF.
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.