What the banking crisis teaches about the digital euro

Euro symbol in front of the old ECB headquarters

The European Central Bank is considering introducing a digital euro.

(Photo: IMAGO/Ralph Peters)

Imagine we have a global banking crisis and there is a digital dollar and a digital euro. One of the arguments for digital cash is that it gives citizens particularly secure “central bank money” guaranteed directly by the central bank, which is otherwise only the case with cash, which is used less and less.

Basically, the crisis would be an ideal argument for the euro in digital form: if the commercial banks falter, you don’t want to be dependent solely on their money and thus their solvency.

In the current crisis, investors have withdrawn their money from struggling financial institutions such as Silicon Valley at an unprecedented rate, as US Treasury Secretary Janet Yellen has noted, which has drawn ridicule on the Internet (“Janet, do you have a smartphone?”). Rumors and information spread faster than ever, and with their smartphones, customers always have their online banking in their pockets.

The smartphone is also a problem

Unlike in the financial crisis of 2008, the problem was not bad loans, but the disappearance of deposits. This problem has been exacerbated by rising interest rates, which are felt more quickly in the money market than in the banks.

If digital dollars were available, Americans might have exchanged their money for this secure central bank money right away at the height of the crisis. This is faster with a smartphone than standing in line at the ATM.

And it is precisely this scenario that skeptics such as former Bundesbank President Jens Weidmann have warned of: the money could disappear from the banking system at an unprecedented rate, causing it to collapse. As paradoxical as that sounds: the high level of security of digital cash is a problem for the system.

Now most concepts provide for an upper limit for the possession of digital money, for example a limit of 3000 euros per person. However, such a sum is always covered by the deposit insurance. So that means: Secure digital money is so dangerous that its use has to be restricted to such an extent that it is no longer useful.

What’s the fun then? You can now pay quickly. In any case, the argument that citizens must get their hands on central bank money has been mooted. It is also striking that in the middle of the crisis nobody is talking about digital money.

Above all, the crisis shows that there are enough problems in the financial sector for which a solution is needed. Nobody needs a solution that requires a problem.

More: Digital euro could put smaller banks in trouble

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