The digital euro can revolutionise digital payments but its future remains uncertain as it grapples with widespread political scepticism about its purpose and value
The digital euro represents a significant advancement in digital currencies and payments. It would serve as a digital form of central bank money issued by the European Central Bank (ECB) for retail use, alongside traditional physical cash. This initiative is driven by the recognition that in an increasingly digitalised world, embracing digital currencies can bring numerous advantages to individuals, businesses, and the broader European Union (EU). To grasp the concept of the digital euro, it's crucial to differentiate between central bank money and private money. Central bank money, often referred to as “public money,” is issued by the central bank and represents the monetary sovereignty of a country or a union of member states, such as the Eurozone. On the other hand, private money, often called “commercial bank money,” is generated by commercial banks and includes bank deposits and loans. The digital euro is a form of central bank money, offering the guarantee and stability associated with such public funds.
The digital euro is a form of central bank money, offering the guarantee and stability associated with such public funds.
However, doubts in the EU Parliament about the central bank digital currency’s (CBDC) purpose have led to calls for a careful and gradual approach, which could postpone decisions until November 2024. Central bank officials need to address technical, economic, and political hurdles about actual utility before moving to technical arguments.
The development process of the digital euro has undergone several phases. In October 2020, the ECB published a report examining the potential issuance of a CBDC denominated in euros. From October 2020 to January 2021, it conducted a public consultation to gather input on the benefits and design of the digital euro. In July 2021, the ECB initiated the investigation phase, focusing on essential aspects like design and distribution. This ongoing phase includes prototyping exercises to explore the digital euro's practicality through collaboration with EU institutions and stakeholders, such as the European Commission, the Eurogroup, and the European Parliament to address design issues and ensure alignment with broader EU policies. The investigation phase is set to continue until October 2023, with the ECB's Governing Council deciding on whether to proceed to the preparation and experimentation phase. This subsequent phase could span approximately three years, leading to the development of the digital euro. Ultimately, the decision to introduce the digital euro will depend on the adoption of the enabling legislative framework by the Council and the Parliament.
The investigation phase is set to continue until October 2023, with the ECB's Governing Council deciding on whether to proceed to the preparation and experimentation phase.
The digital euro's potential to revolutionise digital payments while maintaining the stability and security associated with central bank money makes it a significant development in the financial landscape of the EU.
The ECB and the European Commission have been working on the technical aspects of a digital euro, but the landscape appears lacklustre when it comes to garnering political enthusiasm for this innovation. While new laws are set to be unveiled to establish the CBDC, they primarily focus on what the digital euro should not do, including limitations on holdings and interest payments, aiming to prevent it from competing with traditional savings and investments. The missing piece of the puzzle, as some politicians now argue, is a compelling and affirmative case for why the CBDC should exist and what purpose it should serve. This absence of a clear narrative might account for some challenges in crafting formal legislative proposals. During a recent meeting, Eurozone finance ministers emphasised the need for a persuasive explanation regarding the added value and significance of the digital euro in the lives of European citizens and commercial activities. Proponents within the ECB suggest that the digital euro could serve as a monetary anchor, ensuring citizens' access to state-issued digital money in an increasingly digitised era. Some even advocate that it could bypass the volatile commercial banking system entirely. However, conveying this message to the public has proven to be a formidable task, as an ECB focus group found that few, even among the tech-savvy, had heard much about the digital euro or understood its implications.
While new laws are set to be unveiled to establish the CBDC, they primarily focus on what the digital euro should not do, including limitations on holdings and interest payments, aiming to prevent it from competing with traditional savings and investments.
German Member of European Parliament (MEP) Stefan Berger has been appointed to lead the development of legislation for the digital euro, the ECB's potential CBDC. Berger, who previously played a key role in passing the EU's Markets in Crypto Assets regulation (MiCA), emphasised the importance of trust in the digital euro's success. While the ECB has not yet formally decided on the CBDC, it has invested heavily in its technical preparations. The European Parliament and EU national governments will need to agree on laws to support the currency, with political sentiment in the Parliament influencing the outcome. Scepticism also abounds in the European Parliament, where concerns range from replacing physical cash to fears of the CBDC being tied to a Chinese-style social credit system, despite the European Commission's assurances to the contrary. Some lawmakers question the digital euro's purpose, particularly if it merely duplicates existing payment infrastructure without clear added value. This confusion may stem from the EU's already sophisticated payment networks, which offer citizens a plethora of digital payment options. While officials are uneasy about the reliance on American companies for digital payment methods, many European nationals have seamlessly transitioned to cashless payment solutions, raising questions about the necessity of a digital euro. Some suggest that this confusion may be a deliberate attempt by commercial banks to thwart state competition in the payment sector.
The European Parliament and EU national governments will need to agree on laws to support the currency, with political sentiment in the Parliament influencing the outcome.
As the debate over the digital euro rages on, with divergent views on its purpose, the path to achieving a coherent political consensus before the European elections in June 2024 remains unclear. Amidst this uncertainty, some remain optimistic about the potential of the digital euro, provided a convincing case can be made that resonates with the public. Critics, both in the EU and the United States (US), have raised concerns ranging from privacy issues to conspiracy theories suggesting that CBDCs are tools for state control and surveillance. This broader opposition makes it challenging for central bankers to effectively defend the digital euro. Belgian Central Bank Governor, Pierre Wunsch, noted that some critics view the creation of a digital currency as part of a larger plot to control the world and its citizens. He emphasised the need to clarify that the digital euro is not about controlling individuals' lives. Nevertheless, there are still lingering gaps in support. Austrian central banker Robert Holzmann highlighted the absence of a compelling narrative for the CBDC. He stressed the importance of portraying money as a public good and emphasised the need for the EU to maintain monetary sovereignty amidst threats from private operators and other countries.
Amidst this uncertainty, some remain optimistic about the potential of the digital euro, provided a convincing case can be made that resonates with the public.
Evelien Witlox, the programme manager for the digital euro at the ECB, acknowledged concerns about the digital euro becoming entangled in the broader culture war. Witlox highlighted features of the system designed to protect privacy and ensure individual spending autonomy. However, she recognised the credibility challenge and emphasised the importance of a continuous dialogue to build trust. In navigating this scepticism, central bank officials are grappling with the need to convince the public of the CBDC's merits and honest intentions, going beyond technical arguments and addressing broader concerns about state control and surveillance. Addressing privacy concerns, ECB President Christine Lagarde announced that the digital euro is still approximately two years away. The ECB is expected to make major decisions regarding the CBDC's preparations in the coming weeks. However, many members of the European Parliament, who hold the authority to approve such plans, remain sceptical. Lagarde clarified that the ECB's Governing Council would decide in late October whether to proceed with further piloting of the digital euro project.
The ECB is expected to make major decisions regarding the CBDC's preparations in the coming weeks.
The future of the digital euro remains uncertain as it grapples with widespread political scepticism and varying opinions about its purpose and value. ECB’s upcoming decisions and the ongoing efforts to build a persuasive narrative will play a pivotal role in determining whether the digital euro can overcome these challenges and gain acceptance.
Sauradeep Bag is an Associate Fellow at Observer Research Foundation
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Sauradeep Bag is Associate Fellow at ORF. Sauradeep has worked in several roles in the startup ecosystem and in international development with the United Nations Capital ...Read More +