The digital euro and the global economy: issues and prospects

Abstract

Technology has always been a focal point constantly having new trends to follow. Our everyday lives have been influenced in a variety of ways by the ongoing digitalization of the world economy, which also has an impact on our payment practices. In the current dissertation there has been an effort to highlight and then analyze the evolution of money concluding to a prospective digital currency. Economic history has demonstrated that without money, people encountered problems with the barter system, beginning with the first economies and continuing with the present Euro system. Finding a mean of measurement was prompted by the failure of the barter system, which was the only method used for goods deals. People quickly adopted the use of money as coins as opposed to stones, shells, or rings, leading to global trade, mainly within the Mediterranean. Greece and Greek colonies, could easily trade through a common currency. That same concept, drove the concept of the European Union, an economic and political union with common currency and purposes. Money as currency and as the most acceptable way of exchanges, includes the three main functions, money as medium of exchange, the storage value of money and the money as account unit, which no one other money-experiment like stones could be fulfil. Euro has been disputed for many times during the first and second decade of its use, due to the economic failures such as the economic crises, however it played a crucial and useful role in the Eurozone. With the majority of transactions conducted through cash and banknotes, European Union is now upgrading payments through digital methods, meaning platforms, digital cards or private money, commonly known as stablecoins. After the need of digitalization, not only the European Central Bank but many central banks all over the world has been started to think about the issue of a Central Bank Digital Currency (CBDC). The variety of benefits, like the twenty-for-hours availability and the total anonymity, did CBDC’s more and more desirable to the public. Monetary policy objectives and tools can be also applied to the CBDC’s and there are many scenarios about how CBDC’s could be fulfil better or not the main functions of money. The two designs of CBDC as wholesale and as retail, give a different impact to the transfer mechanism in the global economy and the monetary policy decisions, due to the fact that retail CBDC is available to use by people in contrast with the wholesale CBDC, which designed in order to attend to financial institution’s needs. Moreover, significant are the changes in payment systems through the using of CBD’s than the reserves and bank notes. For these reasons, there are many worldwide examples by the central banks, where tried to examine the issue of CBDC as the main way of exchanges with the most characteristic the Chinese economy with the issue of the digital Yuan. European Central bank, in order to follow the technologically changes and not drop back in contrast with other countries, has been started to focus of the digital euro. After many explanations of why we need a digital Euro in the European area and who will may be the functional design of it, ECB has announced it possible features and their plans of the implementation of the digital euro, where it uses as a supplement of current fiat money. Digital Euro will also have a different effect on monetary policy tools like CBDCs, however this does not mean that digital euro will work negative as a form of investment. The European profitability would alter by the digitized euro, which shift under the size of the balance sheet in the economy and the whole European payment systems and transfer mechanisms will drive to the faster economic efficiency in the European Union. By the increasing European economic growth, there are also positive influence in the independence of the European Union and thus its domination against to the US dollar. However, before the issue of the digital euro, ECB examines also and some further issues, which related with the negative consequences of it such as a possible bank run. In the ECB’s announcement has given solutions in people’s worries about how the digital euro will work in parallel with the banking sector and how might be affected in the future. Another significant issue which makes Europeans to have second thoughts about the digital euro is the similarity of it with the commonly known cryptocurrencies, due to the fact that both of them used the same technology structure. To conclude, the issue of the digital euro could have both many opportunities and challenges, which ECB needs to consider before the introduction of digital euro in the end of 2023.