September 24, 2023

ECB Economists Suggest Limit On Digital Euro Access

Work on the digital euro has been ongoing and its potential effects were under evaluation by a group of economists.

These economists of the European Central Bank (ECB) now insist that the upcoming CBDC’s access should be limited for protecting the current financial system.

This study comes after a proposal earlier, which suggested that digital euro deposits should be limited to about €3,000 per person.

Restrict digital euro access

The European Central Bank (ECB) recently published a report, which said that access to the digital euro should be limited for Europeans to ensure commercial banks don’t see a fall in deposits.

A team of experts produced the paper, which was led by Frank Smets, the head of the Directorate of Economics.

The economists were trying to figure out the impact of the CBDC on the banking sector in Europe. Since there is no empirical data, the economists preferred to consider the reactions of the public to the news of the launch of the digital euro.

On Thursday, the monetary authority had published its study and the authors stated that the ideal amount of digital euro that should be in circulation should be between 15 and 45% of the quarterly GDP of the euro zone.

Previous calculation

The new calculation was made after a previous one had suggested that an individual should not be given more than €3,000 of the central bank digital currency (CBDC).

Fabio Panetta, a member of the ECB Board, had suggested this limit in order to ensure that enough fiat money exists for providing lending support and believed that this is around 34%.

If no limit is imposed on the quantity of the ECB’s CBDC, then it is possible that the amount of the digital euro in circulation becomes too large.

In fact, it could grow to as much as 65% of the real GDP of a quarter of the euro zone. According to researchers, this could have a sizable impact on the valuation of banks and their lending activities.

Public statements

It should be noted that part of the analysis conducted by ECB economists was based on the public statements that had been made about the design of the CBDC by European officials.

Panetta said back in June that any potential negative impacts of the digital euro on the financial system in Europe and its monetary policy could be avoided by maintaining its quantity between €1 and €1.5 trillion.

He also asserted that this quantity would be comparable with the current number of banknotes that are circulating in the economy.

Since the current population of countries in the Eurozone is close to 340 million, it would mean that holdings can be between 3,000 and 4,000 per capital for the digital euro.

Christine Lagarde, the President of the ECB, had said in mid-July that it would take about another year for the investigation phase of the CBDC to be over.

But, she did add that they already had clarity on some of the key principles of the digital euro.

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