Comment on the digital euro
Basically, the digital euro is a good thing. It counters the decline of traditional cash with a modern digital form of cash called Central Bank Digital Currency (CBDC), as money for everyone's use, sovereign money of safe and secure stock, easy to handle, and ensuring financial privacy. To the extent the digital euro becomes widespread, this will also increase the effectiveness of monetary policy and result in much higher central-bank seigniorage, that is, the gain from money creation to the benefit of the public purse; something that has so far mainly benefited the banks through their privileged private creation of bankmoney (i.e. current bank account balances, aka customer bank deposits). With a share of traditional cash in public circulation of only 2–10%, bankmoney now nearly has a unique selling position and a near-monopoly as a means of payment in the public circuit.
Current plans for the digital euro
Unfortunately, according to the current plans of the ECB and the EU Commission, they are planning the big step of introducing the digital euro in the smallest way. It is planned to severely restrict holdings of digital euros (a maximum of 3,000 euros is being discussed) as well as payments with digital euros (a maximum of 1,000 euros). If someone happens to receive more than a total of 3,000 digital euros, the plan is to automatically re-convert the 'excess' into bankmoney.
In contrast to bankmoney, no deposit interest is paid on digital euros (whereas banks do receive deposit interest on their reserve balances at the ECB).
If the digital euro will be restricted in that way, it will remain a non-seller. This is because a universal means of payment relies on private and business users making use of it in large numbers (network effect) and also transferring large amounts of it, not just small change. Moreover, if banks pay deposit interest on account balances while the digital euro is not interest-bearing, most places that accept digital euros at all will immediately convert them into bank balances. This is the main reason why the spread of the digital yuan in China has stagnated since it was introduced in 2022. So, for the banks things essentially remain the same. The system-defining dominance of bankmoney and the role of the ECB as the auxiliary bank of banks are in no way being put into perspective.
The digital euro needs to be unrestricted and interest-bearing
There are two main requirements for the digital euro to succeed.
Firstly, the use of the digital euro - which is supposed to be unrestricted legal tender - should not be arbitrarily restricted. Instead, the use of the digital euro should be left to its public acceptance and the ensuing market demand for it.
Secondly, if the banks pay deposit interest on sight deposits, the ECB should be able to pay the same interest on digital euros. This is certainly not in the spirit of pure ordoliberal teaching. After all, interest is paid on a loan, not on the means of payment. Interest has never been paid on cash. In contrast, bank current account balances may earn interest because they represent an implicit cash loan from customers to their bank. Interest is paid on savings and term deposits because they prevent an expensive outflow of reserves or provide a cheap inflow of reserves. It remains unclear, however, why the ECB pays the banks deposit interest on reserve balances, given the fact that reserve balances come from a loan from the central bank to the banks, not the other way round. The courtesy of a phoney deposit interest rate on central-bank reserves is not justified in banking terms, but is a banking subsidy. However, if one feels compelled to do the banks this stupendous favour, then for pragmatic reasons one can and should also do so with regard to interest on digital euros, in order to facilitate their distribution compared to the ECB-backed quasi-monopoly of bankmoney.