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A central bank digital euro could save the eurozone – here’s how

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Published via The Conversation (UK Edition)

The European Central Bank and its counterparts in the UK, US, China and India are exploring a new form of state-backed money built on similar online ledger technology to cryptocurrencies such as bitcoin and ethereum.

So-called central bank digital currencies (CBDCs) envision a future where we’ll all have our own digital wallets and transfer money between them at the touch of a button, with no need for high-street banks to be involved because it all happens on a blockchain.

But CBDCs also present an opportunity that has gone unnoticed – to vastly reduce the exorbitant levels of public debt weighing down many countries. Let us explain.

The idea behind CBDCs is that individuals and firms would be issued with digital wallets by their central bank with which to make payments, pay taxes and buy shares or other securities. Whereas with today’s bank accounts, there is always the outside possibility that customers are unable to withdraw money because of a bank run, that can’t happen with CBDCs because all deposits would be 100% backed by reserves.

Today’s retail banks are required to keep little or no deposits in reserve, though they do have to hold a proportion of their capital (meaning easily sold assets) as protection in case their lending books run into trouble. For example, eurozone banks’ minimum requirement is 15.1%, meaning if they have capital of €1 billion (£852 million), their lending book cannot exceed €6.6 billion (that’s 6.6 times deposits).

In an era of CBDCs, we assume that people will still have bank accounts – to have their money invested by a fund manager, for instance, or to make a return by having it loaned out to someone else on the first person’s behalf. Our idea is that the 100% reserve protection in central bank wallets should extend to these retail bank accounts.

That would mean that if a person put 1,000 digital euros into a retail bank account, the bank could not multiply that deposit by opening more accounts than they could pay upon request. The bank would have to make money from its other services instead.

At present, the ECB holds about 25% of EU members’ government debt. Imagine that after transitioning to a digital euro, it decided to increase this holding to 30% by buying new sovereign bonds issued by member states.

Digital-Eur0-ZoneTo pay for this, it would create new digital euros – just like what happens today when quantitative easing (QE) is used to prop up the economy. Crucially, for each unit of central bank money created in this way, the money circulating in the wider economy increases by a lot more: in the eurozone, it roughly triples.

This is essentially because QE drives up the value of bonds and other assets, and as a result, retail banks are more willing to lend to people and firms. This increase in the money supply is why QE can cause inflation.

If there was a 100% reserve requirement on retail banks, however, you wouldn’t get this multiplication effect. The money created by the ECB would be that amount and nothing more. Consequently, QE would be much less inflationary than today.

The debt benefit

So where does national debt fit in? The high national debt levels in many countries are predominantly the result of the global financial crisis of 2007-09, the eurozone crisis of the 2010s and the COVID pandemic. In the eurozone, countries with very high debt as a proportion of GDP include Belgium (100%), France (99%), Spain (96%), Portugal (119%), Italy (133%) and Greece (174%).

One way to deal with high debt is to create a lot of inflation to make the value of the debt smaller, but that also makes citizens poorer and is liable to eventually cause unrest. But by taking advantage of the shift to CBDCs to change the rules around retail bank reserves, governments can go a different route.

The opportunity is during the transition phase, by reversing the process in which creating money to buy bonds adds three times as much money to the real economy. By selling bonds in exchange for today’s euros, every one euro removed by the central bank leads to three disappearing from the economy.

Indeed, this is how digital euros would be introduced into the economy. The ECB would gradually sell sovereign bonds to take the old euros out of circulation, while creating new digital euros to buy bonds back again. Because the 100% reserve requirement only applies to the new euros, selling bonds worth €5 million euros takes €15 million out of the economy but buying bonds for the same amount only adds €5 million to the economy.

However, you wouldn’t just buy the same amount of bonds as you sold. Because the multiplier doesn’t apply to the bonds being bought, you can triple the amount of purchases and the total amount of money in the economy stays the same – in other words, there’s no extra inflation.

For example, the ECB could increase its holdings of sovereign debt of EU member states from 25% to 75%. Unlike the sovereign bonds in private hands, member states don’t have to pay interest to the ECB on such bonds. So EU taxpayers would now only need to pay interest on 25% of their bonds rather than the 75% on which they are paying interest now.

Interest rates and other questions

An added reason for doing this is interest rates. While interest rates payable on bonds have been meagre for years, they could hugely increase on future issuances due to inflationary pressures and central banks beginning to raise short-term interest rates in response. The chart below shows how the yields (meaning rates of interest) on the closely watched 10-year sovereign bonds for Spain, Greece, Italy and Portugal have already increased between three and fivefold in the past few months.

Following several years of immense shocks from the pandemic, the energy crisis and war emergency, there’s a risk that the markets start to think that Europe’s most indebted countries can’t cover their debts. This could lead to widespread bond selling and push interest rates up to unmanageable levels. In other words, our approach might even save the eurozone.

The ECB could indeed achieve all this without introducing a digital euro, simply by imposing a tougher reserve requirement within the current system. But by moving to a CBDC, there is a strong argument that because it’s safer than bank deposits, retail banks should have to guarantee that safety by following a 100% reserve rule.

Note that we can only take this medicine once, however. As a result, EU states will still have to be disciplined about their budgets.

Instead of completely ending fractional reserve banking in this way, there’s also a halfway house where you make reserve requirements more stringent (say a 50% rule) and enjoy a reduced version of the benefits from our proposed system. Alternatively, after the CBDC transition ends, the reserve requirement could be progressively relaxed to stimulate the economy, subject to GDP growth, inflation and so on.

What if other central banks do not take the same approach? Certainly, some coordination would help to minimise disruption, but reserve requirements do differ between countries today without significant problems. Also, many countries would probably be tempted to take the same approach. For example, the Bank of England holds over one-third of British government debt, and UK public debt as a proportion of GDP currently stands at 95%.

The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

Copyright © 2010–2022, The Conversation Trust (UK) Limited

Journalist for 25 years with leading publications in India and UAE such as The National, Mumbai Mirror, DNA, Indian Express and former Sports Editor of eIndia.com. Now managing editor of Headline.ae, part of MEMc (https://www.memc.co)

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UAE’s HR excellence in spotlight as merit-based Employee Happiness Awards begins nominations

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Employee Happiness Awards is set to shine a spotlight on ongoing transformations across the human resources (HR) landscape, especially in the context of employee experience and wellness. The brainchild of Plan3Media, a leading event management company known for championing a merit-based awards culture in the region, Employee Happiness Awards is open to nominations in 27 distinctive categories.

In the previous edition held in June 2023, the Employee Happiness Awards received several nominations, some of whom were selected as finalists and gave compelling presentations to an independent jury. The winners and participants were leading companies and HR individuals from industries as diverse as retail, real estate, healthcare, education, and finance. Abu Dhabi Police GHQ, Nakheel, ADNH Compass, Marriott International, Babyshop, Cigna Healthcare, Du, DAMAC Properties, Rove Hotels, Alef Education, Masafi, and Pinsent Masons were among the big winners. Inspired by the overwhelming response to that edition, Plan3Media has added more categories and planned an eventful agenda for the upcoming gala ceremony in Dubai.

CEO of Plan3Media, Jatin Deepchandani, attributed the success of Employee Happiness Awards to its relentless focus on upholding transparency and integrity through a merit-only approach. “As corporate awards increasingly became self-congratulatory exercises, we seized the opportunity to set ourselves apart by instilling a culture of meritocracy. Our relentless efforts to make the Employee Happiness Awards synonymous with HR excellence are now yielding tangible results, distinguishing our accolades from the rest.” In line with Jatin’s words, the Employee Happiness Awards is validated by a reputable global accreditation programme called Awards TrustMark.

Employee Happiness Awards has a rigorous and systematic nomination process. Nominees are expected to initially submit an online form with basic information, category selection, and a write-up about their competencies. Finalists are invited to make a 20-minute presentation to an independent jury, which will evaluate the performance against a few metrics before selecting deserving winners. Plan3Media has set a nomination limit of three categories per company. There are 22 well-defined categories for companies and 5 for individuals.

Over 200 CHROs, HR professionals, government officials, and startup founders are expected to participate in the black-tie gala awards ceremony, scheduled for Friday, June 7, 2024, where Gold and Silver winners will be announced in each category. Finalists and winners of the Employee Happiness Awards will receive a trophy showcasing their competencies in HR strategies and employee experience. Recognized companies will understandably excel at talent attraction and retention.

Nominations for Employee Happiness Awards – UAE, 2024, close on April 5, 2024.

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UAE braces for heavy rain, thunderstorms across the Emirates this weekend

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The weather will be extremely unstable from Friday evening to Sunday noon with varying amounts of rain, lightning, thunder, and occasional hailstorms.The Ministry of Interior and the National Emergency, Crisis and Disaster Management Authority (NCEMA) have called on the public to exercise caution and abide by safety requirements.

People are advised to avoid valleys, mountains and areas prone to flooding. Legal action will be taken against those who break the rules or put themselves or others in danger.Authorities added that roads leading to wadis and mountains will be closed until the weather conditions improve, while the decision to shift to remote learning is up to the emergency and crisis management teams in the affected emirates.

In order to review the readiness levels of various entities, a series of meetings were held by the Joint Assessment Team for Weather and Tropical Situations, headed by the NCEMA.

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Ian Bell to play for Meteora England Champions in World Champions League

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Meteora Developers, a trailblazing force in the business sector, has officially announced its acquisition of the esteemed England Champions cricket team, in partnership with Bollywood icon Jacqueline Fernandez. This strategic move positions the England Champions to enter the prestigious World Championships of Legends (WCL), signaling a historic convergence of cricketing legends and global fan engagement.

The announcement unfolded amidst a glitzy ceremony at Taj Downtown, Dubai, attended by former England captain, Ian Bell and other names from the sporting world

Meteora Developers’ founder and CEO, Mr. Praveen Sharma, expressed enthusiasm about the association with WCL and the ambitious goals for the England Champions. “Our entry into the World Championships of Legends is a pivotal moment for us. With cricketing greats like Ian Bell on our team, we’re poised to build a legacy that will captivate and inspire English fans globally. This is just the start of a thrilling journey,” Sharma asserted, hinting at a promising future for the franchise.

Cricket star Ian Bell, an integral part of the England Champions, underlined the significance of this venture for players and the sport. “Being part of the England Champions under the WCL is an extraordinary opportunity. The league’s innovative approach and the chance to play in England make this a truly exciting prospect. I’m eager to contribute to our team’s success and make our fans proud,” Bell commented, emphasising the players’ enthusiasm and commitment.

Harshit Tomar, CEO of WCL, delivered an impassioned overview of the league’s vision, emphasizing its commitment to redefine the global cricket landscape. Tomar warmly welcomed Meteora Developers and the England Champions into the WCL family, expressing high expectations for the collaboration. “This partnership promises to bring innovation and excitement to cricket, setting new benchmarks for excellence,” Tomar remarked.

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