Digital Euro Can End Bank Crises, Is Better Than Deposits, Ex-Bank of Spain Chief Says

A digital euro, unlike bank deposits, is a safe asset and could help end bank crises or deregulate banks altogether, according to former Bank of Spain Governor Miguel Fernández Ordóñez.

Speaking at a public hearing hosted by the European Parliament's Committee on Economic and Monetary Affairs to discuss a potential central bank digital currency (CBDC), Ordóñez said that the last two major global economic crises arose from using risky assets like bank deposits, which aren't money but promises to return money.

"Digital euros are euros, but bank deposits are not euros. Deposits are just promises to pay euros, and if banks can't fulfill those promises, then you get crises emerging," he said, adding that a CBDC would have the benefit of stability, justifying the use of the digital euro instead of bank deposits.

One of the chief concerns around CBDCs is their potential to threaten the stability of the banking sector by encouraging customers to withdraw their deposits and convert them into the CBDC. If withdrawals are large enough, it could create a liquidity crunch and other potential problems for the wider economy. To mitigate such a risk, European Union plans for a digital euro propose individual holding limits. The plans have also faced criticism from lawmakers and the public over privacy and other concerns.

Ordóñez, one of four experts testifying at the Tuesday hearing, went on to say that a digital euro could help deregulate banking activities entirely.

"And that deregulation would have a very important impact on growth because banking is the most protected sector. The sector is subject to the most intervention of all economic sectors," Ordóñez said.

Conversely, a digital euro issued by the European Central Bank wouldn't need things like deposit insurance or prudential requirements, which would help improve competition, he said.

A CBDC could also let the ECB have "direct monetary policy," said Ordóñez, also a former secretary of state for finance and economy for the government of Spain.

"So the central bank wouldn't have to change interest rates and we will be able to take monetary policy decisions without having to worry about the impact on banking stability. There are other effects, for example, dealing with the centralization of financial decisions or separating monetary policy from government finances. And there's a very important effect for Europeans because if we had a digital euro, then we could have real European monetary union. What we have at the moment is just physical money, coins, notes," Ordóñez said.

The EU has not decided whether to issue a digital euro, and lawmaker Stefan Berger, who is in charge of shepherding the legislation through the parliament, noted during the hearing that they "don't know the technological aspects" of a CBDC "or if it's going to be blockchain."