The digital euro: let’s move beyond the defensive motivation

“The euro belongs to Europeans and we are its guardian. We should be prepared to issue a digital euro, should the need arise” (C. Lagarde, European Central Bank)

Over the past few years, the use of cash has declined globally, large internet providers (GAFA, Alibaba, Tencent, etc.)  have gained a dominant position in the monetary system -especially in Asia- and private digital currencies have emerged as potential alternatives to fiat money. These developments have thus put pressure on central banks to consider new ways of preserving the integrity of the monetary system, leading to the development of Central Bank Digital Currency-related initiatives.

The digital euro project is consistent with the worldwide trend where, according to the Bank of International Settlements, more than 80% of central banks are studying the benefits and drawbacks of issuing local Central Bank Digital Currencies (CBDC) (2020). The rationale behind the development of these initiatives seems clear: ensuring that sovereign money remains available in the digital era.

Undoubtedly, the initiative is timely because doing nothing would amplify the risk of European payments being controlled and offered by global private institutions or foreign central banks (EU’s largest trading partner, China and the US, have already launched their own CBDC initiatives). However, we should not only view the digital euro as a defensive strategy, but rather, reflect on the advantages the digital euro can bring to the European project.

Supporting the international role of the euro

Indeed, a key motivation for launching a digital euro is related to the international role of the currency. As far as we are all aware, the euro deserves a greater international role, justified by the size of the European economy and the importance of its international trade and financial markets. According to the ECB, the US dollar hovers between 50 and 60 percent of global reserve currencies while the euro only represents between 15 and 20 per cent (2020).

The adoption of the digital euro in international trade and its deployment in developing countries with underdeveloped infrastructures could stimulate demand for the euro among foreign investors, enhancing its status and reinforcing European economic autonomy. However, the extent of this impact would be largely dependent on the design features of the digital euro, e.g. limits on the total amount per user and accessibility by non-domestic citizens.

Another key application that could enhance the euro’s role on the international stage relates to retail remittances. Provided an international infrastructure for transferring CBDCs exists, the digital euro would be well-positioned to deliver an improved solution against the poor and costly experience of current remittance systems.

Dynamizing factor for European digitization

According to ECB’s statements, the digital euro would be designed as a central bank liability, offered in digital form for use by citizens and businesses for their retail payments. Its adoption, whose impact on the current payments’ infrastructure is evident, could even have implications beyond the payments arena.

Given the renewed digital set-up the pan-European CBDC would require, emergent technologies such as electronic trust services (promoted by eIDAS Regulation) or distributed ledger applications (promoted by the DLT Pilot Regime) would benefit from the greater adoption of a digital euro. The CBDC would thus reshape a significant part of the current financial infrastructure, pushing current players to upgrade and adapt their systems to the digital currency. 

Moreover, the preparedness for this pan-European initiative would encourage Member States to react, reducing current disparities among the Eurozone regarding the adoption of digital technologies (EU’s heterogeneity in terms of digitization has recently been pointed out by the ECB as a key objective to tackle).

Fostering financial inclusion 

One of the major drivers for issuing CBDCs relates to financial inclusion. This was the main reason the Bahamas became the first region to digitalize their currency, now known as the sand dollar. Financial inclusion is also why China hopes that its initiative called DCEP (Digital Currency Electronic Payment) will provide the large rural population with access to the financial system.

Despite the fact that the Eurozone has one of the lowest unbanked populations in the world, more than 15 million adult citizens still lack access to formal financial services. Therefore, the launch of a digital euro, depending on its core features, would foster financial inclusion by enabling digital payments to those who currently do not have access to banking services.

Additionally, if available to both EU and non-EU citizens, the digital euro could be seen as a sound payment alternative for developing and emerging economies, as the Facebook-led currency initiative “Diem” unsuccessfully attempted to implement. 

Conclusion

When reflecting on the pan-European CBDC, Europe should not miss the opportunity to embrace this initiative as a catalyst for strengthening the European project. Ensuring European financial sovereignty remains the raison-d’être of this initiative, however, a broader vision helps to present key tangible benefits that help to justify the adoption of the digital euro.

Bibliography

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European Central Bank, “The International Role of the Euro”, 2021, https://www.ecb.europa.eu/pub/ire/html/ecb.ire202106~a058f84c61.en.html 

European Central Bank, “The digital economy and the euro area”, in ECB Economic Bulletin, No. 8/2020, The digital economy and the euro area (europa.eu) 

Franco Passacantando, “Digital Euro: Challenges and Opportunities”, in Bilotta, N., Botti, F. (2021). The (Near) Future of Central Bank Digital Currencies. Lausanne, Switzerland: Peter Lang Verlag. Retrieved Feb 13, 2022, from https://www.peterlang.com/document/1068992

Franco Passacantando, “Could a Digital Currency Strengthen the Euro?”, in SEP Luiss Policy Briefs, No. 9/2021 (5 May 2021), https://sep.luiss.it/brief/2021/05/05/f-passacantando-could-digital-currency-strengthen-euro

Sandner, Philipp and Gross, Jonas and Grale, Lena and Schulden, Philipp, “The Digital Programmable Euro, Libra and CBDC: Implications for European Banks,” (2020) https://ssrn.com/abstract=3663142  

Saving and Retail Banking Trade Association (WSBF-EBSG), “Financial inclusion in EU Member States” (2017),  https://www.wsbi-esbg.org/press/latest-news/Pages/Close-to-40-million-EU-citizens-outside-banking-mainstream.aspx 

Stefano Micossi, “An international role for the Eure?”, in SEP Luiss Policy Briefs, No. 37/2020 (2 October 2020), An International Role for the Euro? by Stefano Micossi :: SSRN