Digital Euro: A Solution to Bank Crises, Superior to Deposits, Says Ex-Spain Chief

• The Future of the Digital Euro According to Former Bank of Spain Governor
• Controversies Surrounding the Digital Euro
• Insights from the Public Hearing
• The Role of a CBDC
• The Proposed Solution
• Testimony at the Hearing
• A Digital Euro and the ECB
• Still in Consideration

The Future of the Digital Euro According to Former Bank of Spain Governor

As per the perspective of Miguel Fernández Ordóñez, the ex-Governor of the Bank of Spain, a digital euro issued by the European Union's central bank would be a secure asset, unlike traditional bank deposits. He further suggested that such a currency could help prevent economic crises and promote bank deregulation.

Controversies Surrounding the Digital Euro

Though the plans to release a digital euro were announced earlier this year, it has been facing criticism from lawmakers and citizens alike due to privacy-related concerns. Similar to bank deposits, a digital euro is considered a secure asset that could potentially prevent banking crises or lead to the complete deregulation of banks.

Insights from the Public Hearing

Fernández Ordóñez shared his insights during a public hearing hosted by the European Parliament's Committee on Economic and Monetary Affairs, which was discussing the possibility of a central bank digital currency (CBDC). He pointed out the risks associated with bank deposits, which are merely promises for monetary return and not actual money. He stressed that if these promises are not fulfilled, crises may occur.

The Role of a CBDC

He emphasized that a CBDC would provide stability, thereby making a case for the use of a digital euro in place of bank deposits. However, concerns have been raised regarding the potential impact of CBDCs on the banking sector's stability. There is a risk that it might prompt customers to convert their deposits into the CBDC, leading to potential liquidity crunches and other economic issues.

The Proposed Solution

As a measure to curb these risks, the European Union has proposed individual holding limits in its plans for a digital euro. Despite these measures, the plans have been criticized on the grounds of privacy and other concerns.

Testimony at the Hearing

Fernández Ordóñez, who was one of four experts providing testimony at the hearing, further suggested that a digital euro could pave the way for total deregulation of banking activities. He stated that such deregulation could significantly impact growth, given that banking is one of the most regulated sectors. He added that a digital euro, issued by the European Central Bank, would eliminate the need for measures like deposit insurance or prudential requirements, thereby promoting competition.

A Digital Euro and the ECB

Ordóñez proposed that a CBDC could enable the European Central Bank (ECB) to execute direct monetary policy. This could result in key benefits, including the separation of monetary policy from government finance, and the decentralization of financial decisions. Additionally, a digital euro could usher in a true European monetary union, replacing the current system of physical money.

Still in Consideration

However, the EU is yet to decide on the issuance of a digital euro. During the hearing, Stefan Berger, the lawmaker managing the legislation's passage through parliament, admitted that they are yet to fully grasp the technological aspects of a CBDC or its potential use of blockchain technology.

Edited by Jonathan Stoker