| Euros exist in physical form (notes and coins). There is a digital form of Euros already, called "reserves". However, only banks and other financial institutions are able to hold these reserves (they are allowed to have reserve accounts at the ECB). What you have in your bank account is "credit" from the bank to you. You can currently ask to withdraw this credit in the form of physical Euros. A "Digital Euro" would mean that regular people could hold digital Euros at an account they hold with the ECB, just like the large financial institutions do. This could be useful to allow the ECB to fight price deflation, because: 1. The ECB can directly credit the accounts of hundreds of millions of Europeans (without having to go via banks). This would mean they could fine-tune policy by depositing small amounts every single day in every single account. This solves the "pushing-on-a-string" problem of the ECB making it cheap for banks to lend, but finding that the banks are still unwilling to lend or that people are unwilling to borrow. The ECB could also decide to only top-up the accounts of people with low balances, so that aid is targeted. 2. The ECB can more effectively increase money velocity by enforcing negative interest rates. You can currently avoid negative interest rates by simply withdrawing physical Euros from your bank. But if the ECB discontinues or restricts the availability of physical Euros, you will only be able to withdraw Digital Euros from your bank. If your Euros are digital, you cannot avoid a negative interest rate. Although price deflation is great if you have money or are owed money, price deflation makes it difficult for people who owe money to repay their loans. This is because their labor is earning them less money each year compared to the debt they owe. This is why the ECB and other central banks are very concerned about price deflation. |