Many non-EU member countries, with a high degree of “euroization,” are a perfect case study for a central bank digital currency (CBDC) and its potential effects on their economies. The relationship between the currency of a non-EU state and the euro (EUR) is already quite unique. While the local currency is the official one, the euro is widely used in daily transactions, for savings, and for pricing major purchases like real estate and cars. The exchange rate of the National Bank of the non-EU member state with the euro is actively managed to maintain stability. This very high dependence on the euro is a key weakness.

So, our prediction is that if the Digital Euro (CBDC) rolls out, and people express their distrust by moving away from it, here’s what could happen:

Scenario: The Local Currency as the Alternative to a Distrusted Digital Euro

1. Increased Demand and Strengthening of the Local Currency

If a significant portion of the population that currently uses the euro for everyday transactions and savings decides they don’t want a “programmable” or traceable currency, they will have to choose an alternative. The most logical and easily accessible alternative is the local currency.

This would increase demand for the home currency both for daily transactions as well as for the purpose of saving. This increased demand would subsequently put upward pressure on the domestic currency value relative to the euro. The Central Bank would be forced into intervening in the foreign exchange market to counter the appreciation, but the inherent tendency would be an increase in the home currency.

• A New Financial Landscape

The dominance of the euro in the country’s shadow economy and in major transactions would be challenged. People who previously kept their savings “under the mattress” in euros might begin to trust physical local currency more as a form of non-digital cash. This would also affect the banking system, as people might withdraw deposits from euro accounts and convert them to the local currency.

• The Local Currency Strategy Gets a Boost

For years, the non-EU country’s government and its Central Bank have been pursuing a “local currency strategy” to reduce the country’s dependence on the euro. This has been a slow and challenging process due to public preference for the stability of the euro. The rollout of a distrusted Digital Euro could achieve in a few years what decades of central bank policy have struggled to do. It would give the local currency a significant boost in legitimacy and usage within the country.

• Increased Monetary Sovereignty for the non-EU country

If the local currency becomes a more widely used and trusted currency, the Central Bank’s ability to conduct independent monetary policy will be significantly enhanced. Currently, its policies are often constrained by the need to manage the euro exchange rate. A stronger local currency would provide the Central Bank with more tools to control inflation and stimulate the economy without relying heavily on the actions of the European Central Bank.

• Potential for Volatility and Unintended Consequences

However, this scenario comes with risks. A sudden and large-scale shift away from the euro could create considerable volatility in currency markets. The Central Bank must manage this situation carefully to avoid an excessively rapid appreciation of the local currency, which could harm the country’s export competitiveness. Additionally, while a stronger local currency is typically beneficial for imports, it could also make domestic products more expensive compared to foreign goods.

In summary, a scenario where the Digital Euro is disliked could have a powerful and positive effect on the local currency. It would likely lead to increased demand, a stronger local currency, and a significant boost to the non-EU member’s long-term goal of increasing its monetary sovereignty. It would essentially provide an organic, market-driven catalyst for the local currency, a process that has been a priority for the country for many years.

A New Source of Foreign Direct Investment (FDI)

What about investor behavior? Particularly from those who are wary of the digital euro? Could a non-EU member become a new source of foreign direct investment (FDI)? This is a very plausible and powerful extension of the scenario that could happen in the future.

The Investor’s Perspective on a CBDC

Many investors, especially those focused on wealth management and capital preservation, view certain features of a CBDC with skepticism. The core concerns are often related to:

• Programmability: The potential for a digital euro to be “programmed” with rules that dictate how and when it can be spent.
• Traceability and Privacy: The fear that transactions could be centrally monitored, stripping away the privacy associated with physical cash.
• Centralization of Power: A shift in power from commercial banks to the central bank, which some investors see as a risk to the free market.
• Potential for Negative Interest Rates: The possibility of applying negative interest rates directly to a digital currency to stimulate the economy, a tool that is less effective with physical cash.

For these investors, a jurisdiction that offers a credible and stable alternative to a digital euro becomes highly attractive.

The Non-EU Member Country as an Investment Haven

In this scenario, where the local currency is not just an alternative but also a stronger, more widely used currency due to the public’s distrust of the digital euro, it starts to look like a very appealing option for these investors.

• A Stable, Non-Digital Alternative: For investors who want to move capital out of the euro (and its digital form) but still want to stay within the European sphere, the local currency becomes a prime candidate. It would represent a haven for cash and non-digital capital.
• Lower Currency Risk: The increased demand for the local currency would strengthen its value, and the Central Bank’s greater monetary sovereignty would provide a more stable and predictable economic environment. For investors, this means a reduced currency risk when investing in local currency-denominated assets.
• Investment in Local Currency-Denominated Assets: This trend would not just be about holding local currency cash. Investors would look to park their money in local currency-denominated assets, such as government bonds, real estate, and equities in companies from the non-EU member country. This would be a significant new source of FDI.

The Broader Impact on the non-EU member’s Economy

This influx of “anti-CBDC” investment would have several positive ripple effects on the non-EU member’s economy:

• Increased FDI: A new stream of FDI would boost economic growth, create jobs, and facilitate technological transfer. This is a significant long-term benefit for any developing economy.
• Diversification of Investment: The non-EU member would attract a more diverse range of investors, not just those from the EU. This would make the country’s economy more resilient to a downturn in any single region.
• Strengthening of the Financial Sector: The shift in deposits from euros to the local currency and the increased demand for local currency-denominated assets would strengthen the country’s domestic financial institutions. This would make the entire financial system more robust and self-reliant.
• The Investment Landscape: Just as the local currency would become more prevalent in daily transactions, it would also become the preferred currency for investments in the country. This would be the final, crucial step in the long-term goal of increasing monetary sovereignty.

The idea of attracting investment from CBDC-averse is a powerful new dimension to the analysis. The scenario we have created—where the public distrusts the digital euro—would not only lead to a stronger local currency in the domestic economy but would also position the non-EU member as an attractive investment destination for a specific, and potentially very wealthy, group of foreign investors. This would be a powerful, market-driven force that could help the non-EU member achieve its long-term economic goals more effectively and rapidly than decades of central bank policy alone.