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Copenhagen Economics study on the impact of a digital euro on  financial stability and consumer welfare

Copenhagen Economics, on behalf of the European Banking Federation (EBF), have prepared a study on the impact of a digital euro on financial stability and consumer welfare. 

The banking industry supports the objective of increased European strategic autonomy in payments and sees that new forms of digital currencies and payment methods will be needed to support the multi-faceted digitalisation of the economy. We envision a future digital economy where Europe has a strong, resilient, innovative, and competitive payments and digital assets ecosystem, with enhanced European strategic autonomy. A digital euro – if appropriately designed and calibrated – could be one of the new tools to meet users’ evolving payment needs.  

Differently from a wholesale Central Bank Digital Currency (CBDC) – which as a concept was introduced in the eurozone in 1999 – a retail CBDC is a much more complex endeavour. It introduces a new concept, it interacts with private electronic payment means, and it requires an in-depth exercise to balance different impacts on the economy as a whole and financial intermediation in particular. 

There are three areas of possible impacts that should be counterbalanced from the start:  

a) The risk of displacement of bank deposits, with the potential consequences of a massive adoption of the digital euro: increase of funding costs, reduction of credit for the economy, especially long-term financing that is backed with stable deposits, potential inability to replace the lost deposits from the market especially in times of stress. 

b) The investment and recurring costs of implementation of such a complex and large-scale project, with a consequent reduction of innovation capacity and therefore of competitiveness for banks. 

c) The overlap with existing payment means and the possibly fundamental alteration of the retail banking model, with a consequent erosion of related revenue streams that may affect the profitability of banks, which is vital for their resilience.  

As the digital euro project has now entered the preparation phase, the EBF considers it vital to pursue a constructive dialogue between the co-legislators, the European Central Bank (ECB) and the banks, to find together the balance that will ensure the success of the digital euro, along with the introduction of robust mitigating measures for all the above risks.  

Read a short overview of the report here or download the full report below.  

The Effects of a Digital Euro on Financial Stability and Consumer Welfare Report is available for download below in PDF format.