06 November 2019

Vox EU: A digital euro to save EMU

This column argues that relaunching the euro as digital central bank currency could help reduce the debt of the euro states and end the sovereign-bank doom loop. It would also create a formidable competitor for other global digital currencies likely to emerge in the intermediate future.

[...]Since the beginning of the euro area crisis in 2010, it has been become clear that the original architecture of European Economic and Monetary Union was unstable. Numerous reforms have been implemented, but political disunity has prevented completion of EMU. Contrary to popular belief, EMU is still only a cash union, because only the banknotes issued by the ECB (and the coins issued by the member states alongside) are of the same credit quality in all the member states of the euro area. Bank deposits, on the other hand, differ according to the quality of the loans with which they were created and – in particular – according to the financial capacity of the states to protect these deposits in the event of bankruptcy of banks. A uniform European deposit insurance scheme (EDIS) is to be created in order to ensure the uniform quality of bank deposit money, but political resistance to the pooling of bank risks has so far prevented this. For the same reason, the creation of a ‘safe asset’ in the form of a government bond without default risk, urgently demanded by financial market participants, has remained elusive. 

History has shown again and again that monetary union in the credit money system needs political union as its guarantor. But political union seems more distant today than at the time of the launch of EMU more than two decades ago. Even if we succeed in completing EMU by creating a political union against all odds, we would have established the euro as credit money with all the problems mentioned above.

Against this background, and in view of the challenges and opportunities of digitalisation in the financial sector, I propose to relaunch the euro as digital central bank money. My proposal draws on all three of the above-mentioned ideas for monetary reform: the 100% money concept of the Chicago Plan; the crypto money technique pioneered by Nakamoto; and the asset backing of money suggested by economists of the Austrian school. A more detailed comparison of the various ideas for monetary reform and exposition of how they change the balance sheets of money issuing entities and commercial banks is given in Mayer (2018). I believe that a digital euro offers four important advantages: (1) a safe European common currency without the need to create political union; (2) a monetary order less prone to investment boom-bust cycles; (3) an end to the sovereign-bank doom loop; and (4) the establishment of the euro as a key international currency. [...]

Full column on VoxEU

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