July 14, 2020

Market News

Fear of inflation stands in the way of the digital euro

In addition to the corona lockdown and its economic consequences, the current criticism of the central banking system and the call for a digital euro would have almost disappeared. Although Christine Lagarde tries her best and repeatedly emphasizes how intensively one works on digital central bank money as an alternative currency, the criticism of the possible introduction does not abate. The threat of inflation is being chased like a red cloth and is being pushed below the self-imposed 2% limit with new bond purchases.

Fear of inflation stands in the way of the digital euro

It's all about the fact that central banks can create money out of nothing. This allows any central bank to have a major impact on the economy by setting interest rates. The intermediary commercial banks are the middlemen and of course benefit from the monetary policy measures primarily in their own interest.

In order to keep inflation below a level of 2%, so-called “ quantitative easing ” (QE) has been possible since 2015. It allows the ECB to buy commercial bank assets to support economic growth in the euro area.

How do these quantitative easing work?

  • The ECB buys bonds from the banks
  • This leads to an increase in the prices of these bonds
  • But also that money flows into the banking system
  • As a result, interest rates are falling across the board
  • And loans are becoming cheaper for companies and individuals
  • Consumers pay less to pay off their debts
  • This boosts consumption and investment
  • This creates economic growth and new jobs
  • The ECB is thus securing an inflation rate of close to or below 2% despite rising prices

ECB bond purchases instead of digital euros

There is no longer any talk of the digital euro, at least not for the time being. The new pandemic emergency purchase program PEPP provides for the purchase of government bonds, corporate bonds, bonds and asset-backed securities. Although affected by the lockdown in just a few weeks, the economic impact of the global pandemic is devastating in this country and throughout the euro area.

In the first quarter of 2020, gross domestic product fell by 3.8% and economists do not expect a slight recovery until the fourth quarter of this year. For 2020 as a whole, GDP is expected to fall by 10% or even more, experts say.

Thanks to the intervention of the European Central Bank, the ECB, banks can borrow money on extremely favorable terms. On June 4, 2020, the central bank said in a press report that the Governing Council approved an expansion of the PEPP to a total of EUR 1.35 billion in response to the pandemic downward correction in inflation.

The program of net purchases under the PEPP has been extended until at least the end of June 2021 and will in any case continue until the Council determines the end of the corona crisis and its economic impact.

The ECB is quite used to the crisis mode. For example, since its foundation in July 2009, it has been in various conflicts for more than half the time or is concerned with economic crises. And not even at fault, but because she has no other choice. Because it can no longer leave the path of unconventional monetary policy.

Unconventional because additional money is created out of nothing and it is fed into the economic cycle outside of a normal refinancing framework. But since the global financial crisis spilled over into the eurozone, this unconventional behavior by the leading European bank has become normal.

The digital euro should be decentralized like Bitcoin

Their continued existence is evidently secured until further notice and the negative consequences of their unconventional monetary policy have so far been manageable. And only when there is a noticeable loss of purchasing power for citizens will there be an unleashed discourse on the ECB's emergency policy, if at all. But what about a digital euro and the blockchain euro?

The Bitcoin BTC reacted immediately with price increases when the ECB reported its intention to buy new bonds. Like all cryptocurrencies, it reacts extremely volatile to political or social changes. Especially if they revolve around the basis of the classic financial monopoly.

Inflation seems to trigger an even greater fear in most EU countries than the failure of the ECB's direction. This should be mainly due to the large and conservative investors of the 1970s. They have internalized that inflation must be prevented under all circumstances. And so this term stands for every economic catastrophe that one can imagine. The vulture of inflation always hovers over every chapter of financial misconduct or impending price losses. What is certain, however, is that inflation occurs everywhere and yet does not automatically mutate into a chronic economic problem.

For many skeptics, quantitative easing is the last remnant of capitalism, which is dying anyway. The crypto community sees itself confirmed, however, that cryptocurrencies and perhaps also a digital euro mean the death of capitalism. Central banks exercise indirect control over the economy through artificially low interest rates. But these artificially low interest rates lead to major distortions in the economy.

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ECB continues loose monetary policy

Not only, but probably also under the increasing pressure of the too loose monetary policy, the European unification process regarding a digital euro has stalled. In many places there are large gaps between the one side, which the European Union sees as the greatest challenge since its foundation, and the other side, where Europe has to reposition itself in the changing world.

The reform of the European Monetary Union must continue, says Prof. Dr. Dr. hc Clemens Fuest, President of the Ifo Institute and Professor of Economics, Seminar for National Economics and Finance, at the Ludwig Maximilians University in Munich, source

Among them are quite a few supporters who see Bitcoin as an “antithesis” to the current banking system and who yearn for a decentralized alternative such as the digital euro. But the differences about necessary reforms are obviously difficult to overcome. And so ECB chief Lagarde currently has a hard time despite her sympathy for a digital euro. Instead, there should be a European deposit guarantee that prevents corona from running into banks in individual member states.

Stopping reforms would be the worst option for both sides. So there will be further discussion about whether and what a digital euro could look like. European politics is currently portraying a group of Corona-weary euro members who have run out of energy for far-reaching reforms of the euro zone .

Digital central bank money is moving far away

Central bank money is intended to serve as a reserve, i.e. money that a bank holds with the central bank. If there are no reserves, the bank's ability to take on the risk of handling transactions is lost. With increasing provisions for debts, the reserves at banks must also increase so that all business transactions can be carried out.

This can only be done with fresh money from the central banks. Just as happened recently in the program to combat the consequences of the corona crisis. And so the ECB continues to pursue the consistent goal of an inflation rate of less than 2% with its measures announced in early June.

It also means that the power structure of money creation continues to run and governments benefit most from this system that they approve. With its concentration of power, the central authority is exactly the opposite of the decentralized systems around a blockchain euro.

Bitcoin is a monetary revolution and requires a paradigm shift. The cryptocurrency enables enormous savings for future investments and essentially stands for the benefit of the vast majority of a population instead of a small elite. Cryptocurrencies are able to offer financial sovereignty while maintaining individual freedom.

Fiat money can certainly serve as a model. After all, it was money as a store of value that made it possible in the first place. And can keep an entire economy running in the country through investments.

Will there be a digital euro soon?

Central bank money only a continuation of the ECB's power?

Cryptocurrencies act in a self-controlling manner and independently of a beneficiary of the government and the central banks of Europe. Their power is directly related to the ability to create money. Central bank money could then only be a continuation of this and continue to dictate monetary policy in digital form.

The positive impact on the economy would then also be extremely questionable. After all, the ECB's power is largely based on the fact that it continues to incur new debt to ensure the livelihood of its citizens. In the end, the question may be to what extent we want and can afford a digital euro from a taxpayer perspective.