A report released by Copenhagen Economics in late December has raised concerns about the potential economic repercussions of introducing a digital euro, suggesting it could lead to a permanent reduction in the European Union’s Gross Domestic Product (GDP) by 0.12% to 0.34%. Commissioned by the European Banking Federation, the research aimed to assess the impact of a central bank digital currency (CBDC) on financial stability and consumer welfare.
The report outlines that with a €3,000 holding limit and full 100% adoption, a digital euro could trigger up to €739 billion in deposit outflows from banks. This scenario could result in an annual cost of €20.4 billion for banks in additional funding expenses, potentially leading to higher lending charges and impacting GDP figures.
The study emphasizes that the adverse effects on smaller banks would be more pronounced, given their greater reliance on deposits for funding. While the €739 billion outflow represents 10% of the household deposit base and 3% of total bank liabilities, for smaller banks, it could account for 7% of total bank liabilities.
A German survey cited in the report, conducted in March, highlighted liquidity concerns for institutions if individuals were to convert €3,000 to the CBDC. Only 56 out of 714 institutions would meet the legally required liquidity buffers under such circumstances. In contrast, with a lower €500 holding limit, only 18 institutions would face similar challenges.
The report further analyzes the impact of varying holding limits and adoption rates. For instance, a €3,000 holding limit with a 40% adoption rate would result in €8.8 billion in additional funding costs for banks. Meanwhile, a €500 holding limit with full 100% adoption would cost banks €3.8 billion. These figures assume wholesale funding rates are 3% higher than deposits.
However, the report acknowledges that the most pessimistic GDP scenarios are based on the assumption of a high adoption rate of the digital euro, which relies on consumers perceiving significant added value compared to existing payment mechanisms. The authors express skepticism about such widespread adoption.
Apart from increased funding costs for banks, the report highlights additional financial impacts, including revenue loss on payment services, customer support, compliance costs, and a one-time cost of €3.6 to 6.8 billion for payment service providers (PSPs) to implement the digital euro, as estimated by the European Commission. Merchants are also expected to bear costs for upgrading point-of-sale hardware, ranging from €0.5 billion to €14 billion.
The European Central Bank has recently initiated calls for vendors for various digital euro initiatives, projecting costs of up to €1.1 billion for these efforts.
