In June 2023, the European Commission presented its legislative proposal for a digital euro, following the European Central Bank’s decision to move into the preparation phase of the project. The digital euro would be a retail central bank digital currency (CBDC), accessible to citizens across the euro area with legal tender status, like cash.
Its objectives include ensuring the euro remains a stable monetary anchor in a society with declining cash use, promoting innovation and competition in payments, supporting financial inclusion, and strengthening EU monetary sovereignty.
However, many design features of the digital euro remain undefined, and uncertainty about its broader implications is high. Copenhagen Economics, on behalf of the European Banking Federation, has analysed the potential impact on financial stability, consumer welfare, and innovation.
Our study shows that the introduction of a digital euro could trigger substantial withdrawal of money from commercial banks by individuals and businesses, raising bank funding costs and potentially amplifying bank runs in times of stress in its current shape and design.
With a holding limit of €3,000 per person, deposit outflows could amount to €739 billion (10% of household deposits), with smaller banks particularly exposed. This could increase lending costs, reduce credit supply, and ultimately weigh on investment and GDP.
The case for significant benefits to competition, consumer welfare, or financial inclusion appears limited, as many of the policy objectives are already being addressed by existing EU legislation and market-driven innovation. Moreover, the digital euro will entail substantial launch and compliance costs for banks, payment providers, and merchants, many of which are likely to be passed on to consumers.
Our key conclusion is that careful design choices – especially around holding limits and the business model – are critical if a digital euro is to be implemented. Lower holding limits, possibly even zero, would significantly mitigate risks to financial stability while still enabling use of the digital euro as a means of payment.
