Paper by Prof. Bofinger and Thomas Haas: The Digital Euro (CBDC) as a Monetary Anchor of the Financial System
04/13/2023The ECB justifies the supposed necessity of a digital euro by its alleged anchor role. In their SUERF Policy Note, Prof. Bofinger and Thomas Haas identify and discuss three potential anchor roles of the digital euro. In doing so, they point out shortcomings in the ECB's argumentation.
The European Central Bank justifies the introduction of the digital euro with the role of a central bank digital currency as a monetary anchor. Three anchor roles for a CDBC can be distinguished: First, as an anchor for commercial bank deposits, guaranteeing their convertibility into central bank money. Second, as an anchor to maintain the national currency as a unit of account. Third, as an anchor for maintaining the central bank’s control over the financial system. We discuss the different anchor roles and analyse whether the introduction of a CBDC is necessary for these anchor functions. We argue that a CBDC can be justified as an anchor for bank deposits, but this would require unlimited access to a store of value, whereas the ECB envisages very limited CBDC holdings as a means of payment. Anchoring the national currency as a unit of account requires the stability of the currency. For the central bank’s control over the financial system, it is crucial that banks need central bank money as a means of payment and settlement. Thus, it is the holding of central bank money by banks, and not by non-banks, that is required as the ultimate monetary anchor for the financial system. Finally, the experience of several major central banks shows that the appropriate response to the declining use of cash in retail payments is not a CBDC, but the orchestration of competitive national retail payment systems.
