Wednesday November 10, 2021
Bundesbank chief points out risks
“The digital euro cannot recreate cash”
Contactless payment has grown in popularity during the pandemic. Nevertheless, many Germans still rely on notes and coins. According to Bundesbank boss Weidmann, cash will also play an important role in the future. Even a digital euro will not change that anytime soon.
Despite a trend towards cashless payments, the demand for banknotes in Germany remains high. “For the current year, there are signs of a net issue that is lower than in the previous year, but slightly exceeds the value of 2019,” said Bundesbank President Jens Weidmann, according to the speech at the opening of a symposium of the Bundesbank in Berlin, which will also be broadcast live on Internet has been transmitted. “The demand for cash continues to grow, although its importance as a means of payment has declined. Its function as a store of value explains this paradox,” Weidmann explained.
In 2020, the Bundesbank issued euro banknotes with a total net value of 70 billion euros through its branches. 60 percent of everyday transactions that are made in Germany are still paid for with bills and coins. However, the corona pandemic has given non-cash payments a boost. For reasons of hygiene, retailers are promoting contactless payment at the checkout, and online trading is booming. It is convinced that “cash will also play an important role in the foreseeable future,” affirmed Weidmann. “No other means of payment will be able to reproduce all of its properties. Not even the digital euro.”
The digital euro cannot offer the anonymity of cash
Europe’s monetary authorities have been looking into the possible introduction of a digital variant of the European common currency for a while now. In mid-July 2021, the European Central Bank (ECB) decided to take the preparatory work to the next level: In a two-year investigation phase, it is now about technology and data protection. It has not yet been decided whether a digital euro will come. “One thing is clear: the digital euro will not be able to offer the anonymity of cash. After all, digital payments always leave traces,” said Weidmann.
“Particularly in view of the risks, it could make sense to proceed step by step with the digital euro. That means first equipping the digital euro with a certain bundle of properties that allow important uses as a means of payment. Other functions could be added later.” However, it should be another five years before the digital euro arrives.
Weidmann also warned: “At least to a certain extent, the digital euro would be an alternative to bank deposits. Therefore, it could change the structures in the financial system or create new risks for financial stability.” Therefore, it is being discussed to limit the holding of digital euros, for example through an upper limit or a less favorable interest rate for higher amounts. This reduces its attractiveness as a store of value for consumers – in relation to bank deposits, but also to cash, said Weidmann.
Many central banks are currently examining the introduction of digital versions of their currencies. China is one of the pioneers and the Russian central bank also wants to test a digital ruble in a pilot phase next year. Weidmann will step down from office at the end of the year. He was often in a minority position on the ECB’s Governing Council when it came to monetary policy, which he traditionally would like the Bundesbank to follow a rather tight line. Weidmann and Belgium’s central bank chief Pierre Wunsch were the only ones on the ECB Council in July who had rejected the euro central bank’s new monetary policy outlook until the very end. In his farewell letter to employees, he warned them to keep inflation risks under control.