The ECB lays the ground for even deeper negative interest-rates.

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by Shaun Richards

The last day or so has brought quite a bit of news concerning the European Central Bank or ECB. The opening salvo was fired by ECB board member Panetta in a speech about a subject we have been observing for a while. Actually as early as the second paragraph he made quite a faux pas.

Attempts by central banks to issue banknotes in the 17th century resulted in too many being issued and even defaults, raising questions about their effects on stability and, ultimately, on the credibility of the sovereign.

Really rather like the ECB and its more modern version of this then.

Annual growth rate of broad monetary aggregate M3 increased to 12.3% in December 2020 from 11.0% in November………..Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 15.6% in December from 14.5% in November.

He then began to set out his case for a digital Euro although I could not help wondering why if all what he describes has happened without one why we need it at all?

At the same time, we have seen a profound shift in payment preferences, with the use of cash in retail payments declining. Even before the pandemic, one in two Europeans said they would prefer to pay digitally in a shop. The pandemic has accelerated this trend. This is the first reason why we are working on a digital euro: combining the safety of central bank money and the convenience of a digital means of payment in order to satisfy consumer preferences.

As ever we find ourselves noting half-truths. For example cash use in retail payments has fallen (quite sensibly) but cash itself has been on something of a tear. I pointed this out on the 29th of January.

Before I move on let me point out that the amount of cash in circulation rose by another 8 billion Euros in December. That means the annual rate of growth is 11.3% which is not bad for something we keep being told is in decline!

Indeed if we note what we are often told s the reason for this the Euro area must be awash with criminal activity! Or at least what central bankers consider to be criminal. The emphasis is mine.

The global tech giants – or big techs – are setting the pace of change in the provision of financial services in various ways. They are seeking to sidestep traditional distribution networks – including payment systems – through their control of social media, online marketplaces and mobile technologies.

You can almost here them screaming The Precious! The Precious! I mean how would senior bankers be able to live such lavish lifestyles? We might even have to stop bailing them out. Also if the banks decline so will the central banks.

The next bit sounds like someone saying only the banks are allowed to behave like this.

Moreover, integration with other services provided by big tech companies may threaten competition through tying, bundling, cross-subsidisation and winner-takes-all dynamics.

Perhaps he could let us know what real choice the ordinary person has in the banking arena?

This could crowd out traditional intermediaries and reduce competition in financial markets, limiting consumer choice.

He seems to have two main fears, the first of which is that the techs seem to have a much better product than the banks.

This could lead to the rapid and large-scale take-up of the financial services offered by big techs, both domestically and across borders

Next that the Euro area has yet again been off the pace.

In Europe, the expansion of big tech companies could make us dependent on technologies governed elsewhere.

Two Big Problems

Negative Interest-Rates

The first has already been mentioned and is a rather big lie. We are told the money is safe and yet later there is this.

One option would be to limit the amount of digital euro individual users can hold.

The Starship Enterprise is on yellow alert now. What limiys?

Another option would be to set a penalising remuneration on individual users’ digital euro holdings above a certain threshold. Up to that threshold, amounts held in digital euro would never be subject to negative interest rates and would thus never be treated less favourably than cash.

Is “penalising” a new definition of safety that needs to go into my financial lexicon for these times? Also the threshold is set at a low level.

As a yardstick, a threshold of €3,000 would be more than the amount of cash most citizens hold today and would be above the average monthly wage in most euro area countries.

I have no idea what the average monthly wage has to do with it although I note that quite a few people would be at risk of penalty from their monthly salary. Also if say you were borrowing money to buy a property you had better keep cleat of this digital Euro as you could to use a technical term be shafted. The ECB did do that to some people in Cyprus in its crisis, so it has form in this area. For those of you thinking that central bankers will be caught no doubt there will be private ECB accounts for them to which this does not apply.

The penalty comes in a rather familiar form to followers of my work.

ECB‘S Panetta: Minus 1%-2% Remuneration On Digital Euro Could Not Be Enough To Prevent Capital Flows Out Of Banks In Crisis ( @LStrade2 )

So we seem to have arrived again at the -3% suggested by the IMF. Or perhaps even more.

For example, in times of crisis it could be necessary to adjust the remuneration of the digital currency,


This is the next issue.

 It would have the protection of privacy as a key priority,

Apparently it is going to achieve that by checking amounts down to 3000 Euros! But wait there is more.

But crucially, in order to preserve stability, it should be designed in a way that prevents it from being used as a form of investment.

So they will be checking on that too. Also the banks will have your details too.

Financial intermediaries – in particular banks – would provide the front-end services, as they do today for cash-related operations. We would provide safe money, while financial intermediaries would continue to offer additional services to users.

There is another linked area where you will again have to provide details. But if you read the bit below there is yet another contradiction. The ECB regularly boasts about the growing international use of the Euro, which it is now going to set out to chop.

Similar design features would have to be applied to the use of a digital euro by non-residents. This would stop a digital euro replacing other forms of investment and facilitating currency substitution in countries outside the euro area.


There is a saying that a camel is a horse designed by a committee and the digital Euro looks exactly like that. The most basic issue is that the only real need for it is a panic over the role of the Euro area banks who see their role being gradually and sometimes not so gradually being usurped and replaced by the big tech companies. This has created advances for people such as those who like to pay with their phone or Apple Watch. The tech companies are much more fleet of foot than the ossified banks. So the ECB wants to step in to protect them.

First, the risk of bank disintermediation depends on the design features of a digital euro. We can and should design it in ways that prevent this risk.

Why? What have the banks ever done for us?

There are of course privacy issues with big tech although you do at least have some sort of choice and in return you get innovation. Whereas with the digital Euro you get privacy issues, a likely penalty ( the whole speech lives in a Euro area which does not already have a -1% interest-rate for the banks) and a lack of innovation.

As a final point perhaps Mr.Panetta could explain how this works with privacy? As it looks like a combination of Big Brother and Big Sister.

For example, it could provide the central bank with real-time information on deposit flows, enabling a swift reaction if needed.


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