The appearance of a private currency (for example the Libra) is unacceptable for central banks

To understand central banks’ rejection of Facebook’s Libra, at least in its initial version, it is useful to draw a parallel with the relationships between two public currencies, for example the dollar and the euro. There is free movement of capital between the United States and the euro zone. Let us then assume that the euro zone’s residents decide to switch part of their savings into dollars. There are then two possibilities: Either the United States and the euro zone want to maintain a fixed exchange rate between the dollar and the euro; the Federal Reserve (or rather the US Treasury) must then buy euros and sell dollars, and the ECB must sell dollars and buy euros; the money supply in dollars increases and the money supply in euros declines. It is well known that sterilised foreign exchange interventions (that do not affect the money supply) are ineffective; Or the United States and the euro zone are in a situation of flexible exchange rates and the euro depreciates against the dollar. Let us now look at the relationship Libra-euro. The Libra is a private currency since it could be used as a means of payment and a savings vehicle. If euro-zone residents decide to switch part of their savings (and their transactions) from the euro to the Libra, there are the same two possibilities as between the dollar and the euro: Either Facebook (we call this entity Facebook for the sake of simplification) decides to maintain a fixed exchange rate between the Libra and the euro; Facebook must then buy euros and sell Libra, and therefore accumulate reserves in euros; there would then be an increase in the money supply in Libras and a decline in the money supply in euros (held by economic agents other than Facebook) ; Or Facebook does not intervene, and the price of the Libra in euros rises (the euro's exchange rate against the Libra depreciates) . We see that the ECB cannot accept this choice : Either it loses control with the money supply in euros ; Or the euro depreciates sharply (against the Libra but also against other currencies if there are sales of euros) .