Implications of the Digital Euro for Monetary Policy Transmission Outside the Euro Area

Deyan Radev, Book chapter in Digital Assets and the Law: Fiat Money in the Era of Digital Currency (Routledge–Giappichelli), 2024, (Indexed in Scopus)

Cite as: Radev, D., 2024, “Implications of the Digital Euro for Monetary Policy Transmission Outside the Euro Area“, in: Digital Assets and the Law: Fiat Money in the Era of Digital Currency, Eds. Zatti, F., Routledge-Giappichelli Publishing House, https://doi.org/10.4324/9781003258261-10.

A digital euro won’t stop at the euro area’s borders. Even if it is designed primarily for euro-area residents, a well-functioning retail CBDC issued by the ECB could be attractive to users, firms, and financial institutions outside the euro area – especially in nearby economies. This chapter explains how that could happen and why the design details matter as much as the headline idea.

The core argument (in plain language)

A retail CBDC like the digital euro is not just a new payment instrument. It could become a new form of central-bank money available to the public, alongside cash and commercial bank deposits. That changes the plumbing of monetary policy transmission in two ways:

1. Inside the euro area: it may strengthen some channels of transmission (faster pass-through to households and payments), but it can also create new financial-stability risks (deposit outflows from banks in stress).
2. Outside the euro area: it can create spillovers – because people and firms in neighboring countries might want to hold and use the digital euro, potentially affecting local monetary control and bank funding.

How the digital euro could change monetary policy transmission

The chapter highlights a fundamental trade-off.

Potential upside: more direct and efficient transmission
A digital euro could make the ECB’s policy stance more visible and more directly relevant to households and firms – for example through:

• lower payment frictions,
• faster settlement,
• easier digital access to central bank money,
• and (depending on design) clearer linkage between policy rates and the return on CBDC holdings.

In other words, if the digital euro is convenient and widely accepted, monetary policy can “reach” end-users more directly through the payment and liquidity channel.

Key risk: disintermediation of banks
At the same time, the chapter emphasizes that a digital euro could intensify deposit substitution: households may shift part of their money from bank deposits to CBDC holdings – especially if they perceive CBDC as safer (a direct central bank claim) or more usable.

That matters because deposits are a major funding source for banks. Large shifts could:

• increase banks’ funding costs,
• reduce credit supply,
• amplify stress episodes (digital bank-run dynamics),
• and force central banks to rely more on liquidity facilities and backstops.

Why the “design” is the policy

The chapter’s key message is that CBDC design is monetary policy design. Several features determine whether the digital euro becomes a modest payments innovation or a system-shaping instrument:

• Holding limits: Caps can reduce bank disintermediation risk by preventing very large shifts from deposits into CBDC.
• Remuneration (interest rate): If CBDC is remunerated competitively (or tiered), it becomes a stronger competitor to deposits; if not, it may remain mainly a payments tool.
• Access rules for non-residents: This is central for cross-border spillovers. Wider access increases the likelihood of “digital euroization.”
• Privacy and AML/KYC rules: These shape adoption incentives, compliance costs, and whether CBDC becomes a mainstream tool for everyday payments or remains niche.

Spillovers to non-euro countries: “digital euroization”

For economies outside the euro area, the chapter discusses a realistic scenario: currency substitution driven by convenience and trust rather than by crisis. If people and firms can hold and use a digital euro easily, it may become attractive for:

• savings (perceived safety),
• e-commerce and cross-border transactions,
• tourism and remittances,
• and payments in sectors where euro pricing is already common.

This could increase the ECB’s effective monetary footprint beyond the euro area, because the more domestic money demand shifts toward euro instruments, the weaker local monetary autonomy becomes.

Why it matters for Bulgaria / CEE

For Bulgaria and many CEE economies, this topic is not theoretical. The region is characterized by (i) close real and financial integration with the euro area, and (ii) strong incentives to improve cross-border payments and reduce transaction costs.

Here are the concrete implications:

1. Monetary sovereignty and euro adoption dynamics
   Bulgaria has a currency board and strong links to the euro. A widely usable digital euro could accelerate “functional euroization” in everyday transactions – even before formal euro adoption – by making euro-denominated payments frictionless. For non-euro CEE countries, broader digital euro access could reduce the effectiveness of domestic monetary policy by shifting part of money demand and payment activity into euro instruments.
2. Bank funding and credit supply in a bank-based region
   CEE economies are bank-financed. If households shift deposits into digital euro holdings (especially in periods of stress), local banks may face higher funding costs or reduced stable funding – potentially tightening credit. The risk is not just long-run disintermediation; it is also faster stress transmission during turbulence (“digital flight to safety”).
3. Cross-border payments and competitiveness
   The upside is significant: cheaper, faster euro payments could benefit trade, tourism, and SMEs operating cross-border. For CEE firms integrated into EU supply chains, improved settlement and lower payment costs can raise competitiveness – provided the architecture does not destabilize local intermediation.
4. Policy positioning: the region has an interest in design choices
   Because spillovers are plausible, Bulgaria/CEE stakeholders have a clear interest in ECB design decisions – especially holding limits, tiered remuneration, and non-resident access models – and in ensuring that local supervisory and liquidity frameworks are ready for new forms of deposit volatility.

Key takeaways

• A digital euro is not only a payment tool – it can reshape monetary transmission and bank funding.
• Cross-border access may amplify spillovers via currency substitution (“digital euroization”).
• The outcome hinges on architecture: limits, remuneration, and access rules determine whether benefits dominate risks – especially for neighboring non-euro economies.