The European Central Bank is accelerating its work on the digital euro – a project to make Europe independent of the dominance of US payment systems and prepare the Union for a cashless future. However, the ECB’s latest simulation shows that the road to digital sovereignty can lead through dangerous curves, especially for the classical banking sector.
According to a study commissioned by European lawmakers, in an extreme financial panic scenario, up to €699 billion – or 8.2% of retail deposits – could flow out of commercial banks into the digital euro, guaranteed directly by the ECB. This would not be a simple digital migration of funds, but a massive ‘run on safety’, potentially triggered by a crisis of confidence.
A group of smaller lenders, particularly those heavily reliant on retail customer deposits, would be hardest hit. In the simulation, 13 out of more than 2,000 banks would fall below the required liquidity levels.
The key fuse is to be the limits on holding digital euros. The ECB has tested ceilings ranging from €500 to €3,000 per person – and it is the amount of this limit that determines the scale of the risk. A limit of €3,000, while attractive to users, would, according to the analysis, reduce the average return on capital of banks by 30 basis points. Lower thresholds, on the other hand, would significantly reduce deposit outflows, but would make the new currency less competitive with cash and fintechs.
In a ‘business as usual’ scenario, i.e. without panic, the outflow of funds into the digital euro would be around €100 billion – a level that the banking sector could absorb, especially with a continued move away from cash.
So there is a paradox hovering over the project: the digital euro is supposed to increase confidence in the European financial system, but it could also undermine the foundation of the model based on deposits in commercial banks. “You can only make the digital euro attractive if you are prepared to hurt the banks a little bit,” said MEP Fabio De Masi.
EU finance ministers have already adopted an implementation roadmap, leaving it to themselves to decide on the final shape of the project. The ultimate question, then, is not ‘if’ but ‘under what conditions’ the digital euro will become part of Europeans’ wallets. The European currency project, this time in the app era, could re-evaluate the relationship between citizens, banks and the state – perhaps more powerfully than the adoption of the euro itself 20 years ago.
