Should the ECB proceed with a digital euro?

THE European Central Bank (ECB) is preparing for a possible digital euro. This would be a liability of the bank, like paper currency and deposits. However, with digital currencies in high supply in a saturated market and traditional payment methods remaining popular, the ECB needs to assess if launching the digital euro is worth the effort.

Deposits at the ECB have grown enormously as a result of quantitative easing and now stand at four trillion euros. In the 21 years of their existence, euro banknotes have increased seven times in value – up to 1.6 trillion euros – amounting to a compounded annual increase of about 10 per cent. The corresponding figure for the US dollar is 6.5 per cent, while sterling is 5.2 per cent and the Swiss franc is 4.4 per cent.

Some argue that the popularity of cash is due to growing illegal activities, but this is unlikely to explain the phenomenon. Until now, the increase of the euro in circulation has been very steady; indicators of criminal activity do not have such a smooth profile. And the increase in euro coins shows more or less the same pattern. Criminals and tax evaders are unlikely to make extensive use of coins.