ECB officials warn of the negative impact of the digital euro on foreign currencies

The digital euro could undermine financial stability in non-EU countries with weak economies, displacing their national currencies. This was stated in a speech by Fabio Panetta, a member of the European Central Bank’s Governing Council.

?A digital euro would be a form of sovereign money provided in electronic format. It would be used by households, businesses and intermediaries to make or receive retail payments throughout the euro area, says Executive Board member Fabio Panetta https://t.co/mCfEZKIadp
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— European Central Bank (@ecb) December 10, 2021

“A digital euro could spread to third countries to such an extent that it displaces local currencies. This would lead to euroisation, which could hamper the conduct of monetary policy and lead to financial instability,” Panetta said.

He stressed that these risks would be higher for developing economies, as their national currencies are too weak and they are highly dependent on trading and financial partners. 

Panetta also noted that the launch of the CBDC in the EU “could intensify the transmission of shocks between economies and exchange-rate volatility.” According to him, liquidity, low risk, and the reward rate would make the instrument attractive to international investors.

At the same time, the official said that the issuance of a digital euro would reduce the EU’s dependence on the dollar and strengthen the region’s financial stability. Panetta called the dollarisation of international payments a “colonisation” and noted that “two American intermediaries [Visa and MasterCard] process two-thirds of card payments in Europe.”

“CBDC will raise the international role of the euro, strengthening Europe’s autonomy and reducing the dollar’s global dominance,” he said.

In June, Panetta said that the digital euro would provide better privacy protection than private stablecoins.

In April, ECB President Christine Lagarde said that the institution could issue the CBDC within four years, if policymakers approve the project.

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