A bond-backed currency would overcome problems created by incomplete monetary union, writes former chief economist of Deutsche Bank Thomas Mayer.
[...] I believe there is a solution: the creation of a truly digital euro. The first step towards such a digital euro would be to introduce a bank deposit fully backed with central bank money. The ECB could effectively create funds needed to cover the deposit by purchasing outstanding eurozone government bonds.
In a second step, the secure deposit could be set up as digital central bank money that can be transferred from person to person or company to company using blockchain technology. The euro would then become a “stablecoin” backed solely by government bonds. Only the ECB (and not the commercial banks) would be responsible for issuing it. To protect this new asset token from abuse by governments and counterfeiting, the electronic euro could be endowed with a digital watermark. This would mean embedding the rules for the original establishment and future increase of money supply as a “smart contract” in the coding associated with the asset token.
The money supply would be increased through further purchases of government bonds, but such purchases would have to be agreed independent of political influence and using a long-term perspective.
For instance, growth of the digital euro money supply could be geared to the expected growth potential of the euro area economy.
Rather than relying on bank lending, the money supply would be expanded by increasing ECB holdings of government bonds. To avoid printing money to finance government budget deficits (as proposed by modern monetary theory), governments could commit themselves to distribute the money they receive from the bond sales directly to their citizens as a “money dividend”.
In a world of digital euros, commercial banks’ main role would be to take deposits and lend them to investors. They could continue to create private debt money through lending, but there would be no state guarantee for conversion at parity into digital euros. Banks would start to resemble investment funds whose assets are protected against first loss by an equity cushion. Savers could choose the bank that suited them according to their preferences for returns and first loss protection. The central bank would lose the ability to use interest rates to manage banks’ credit money creation for policy purposes. Given the new impotence of monetary policy in a world of negative rates, this would hardly matter.
Digitalisation offers a way to reduce the debt of the eurozone states and to safeguard the euro. Fiscally conservative northern countries would agree to the one-off monetisation of old debt on the balance sheet of the ECB in order to ensure the creation of secure money. In return, the highly indebted southern countries would have to accept that after the one-off monetisation of their old debts, further bailouts through debt monetisation would be impossible. The process would remove government bonds worth €7tn from the market. Public debt of all eurozone countries could be reduced to less than 25 per cent of gross domestic product, giving each one new room for prudent fiscal policy.
Money created through bank credit needs strong state backing that the eurozone failed to build. Digital money, on the other hand, can exist without a state guarantee. A digital euro issued by the ECB would not only be stronger but could compete with the dollar as well as other digital money to become a global reserve currency. Central bankers are conservative by nature and averse to experiments. But with their backs against the wall, they will soon have no other choice than to contemplate experimental medicine to save the euro from breaking apart in a recession.
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