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The Debate over a Digital Euro
Alexander Privitera
AGI Non-Resident Senior Fellow
Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.
At a recent hearing before the European Parliament, Piero Cipollone, the Executive Board Member of the European Central Bank (ECB) in charge of the digital euro project, reminded his audience why “the digital euro is not merely a technical undertaking—it is a vital, forward-looking step to ensure that central bank money continues to serve Europeans in an increasingly digital world.” Cipollone and his colleagues at the ECB have their work cut out for them. Many European banks have resisted the project from day one, wary a digital euro might cost them customers and revenue. Even in the European Parliament there is skepticism.
In essence, a digital euro is meant to extend the benefits of cash to digital payments. Cash is still a popular means of payments in some of the biggest EU member states, such as Germany or Italy. But according to the ECB, online payments now account for at least one-third of all day-to-day purchases in Europe and their role continues to grow fast. This trend is described as the dematerialization of money. It poses a threat to cash. By pushing for the introduction of a digital euro the central bank is, in essence, trying to throw cash a lifeline.
For European authorities the wake-up call to this new reality occurred when the company Meta, then Facebook, announced its own plans for a privately issued cryptocurrency in 2018. At the time the social media group’s grandiose attempt at changing the nature of money disintegrated against a political and regulatory wall both in the United States and in the European Union. But their two central banks drew vastly different conclusions from that experience.
In the United States, the Federal Reserve, issuer of the main global reserve currency, concluded that its predominant role in the global financial system could not be easily challenged. While some exploratory work on a digital dollar was carried out, the Fed ultimately did not see a compelling need to move forward decisively.
In Europe, the ECB recognized that having successfully staved off one attempt did not mean the broader trend was going to be reversed. Discussions on a digital euro were already underway, but the idea of a European CBDC gained urgency because the monetary union is still more vulnerable than the United States. Especially given that the wide adoption of digital payments means that online transactions in Europe have come to depend on non-European private payment providers, such as Visa or Mastercard.
If the role of cash became marginal, the balance between public and private money could be undermined. This matters because central banks only issue public money, cash. It is commercial banks that create private money. They do so by extending loans. Central banks do, of course, influence the creation of private money by setting interest rates, and they provide liquidity to traditional credit institutions, especially when the plumbing of the financial system malfunctions. But they have less control over the non-banking system. Digital payment service providers are not banks. But their growth into activities that resemble deposit taking and lending has increasingly blurred the lines between traditional banking and non-banking activities. So far, European banks have been slow to respond to the challenge. Various attempts at setting up their own integrated, private cross-border payment services have floundered.
The recent hype about stablecoins, a private digital asset that mimics a currency—most are dollar denominated—has added a new source of disturbance and compounded the sense of urgency with which the ECB is pursuing its plans. The worry is the currency union may risk undermining parts of its monetary sovereignty, in other words, the central bank’s ability to respond to financial shocks and/or changes in price developments, its two core functions.
Dutch central bank governor Olaf Sleijpen recently told the Financial Times that “If stablecoins in the United States increase at the same pace they have been increasing… they will become systemically relevant at a certain point.”
Stablecoins are crypto assets pegged to major currencies, such as the dollar or euro. They can be useful to park liquidity in the crypto space. But they can also be used to transfer small or large sums quickly around the globe (without proper anti-money laundering controls). Some critics say the use-case for stablecoins is limited, others respond that it represents a challenge to traditional and usually more costly ways of transferring funds across borders via banks. If stablecoins were widely adopted, they could end up in the same gray area, between banking and non-banking activities, in which traditional commercial credit institutions and payment providers compete.
Importantly, these tokens promise to hold their value against their underlying currency. To ensure stablecoins are truly redeemable at all times at par, issuers buy safe assets, mostly short-term government bonds, typically U.S. treasury bills. So far, all major offerings of stablecoins have been dollar denominated. They are creating an important source of demand for U.S. “safe assets,” treasury bonds.
Thus, their success could potentially minimize any future threat of a sovereign bond investors’ strike, despite the increasingly precarious fiscal position of the U.S. government. In other words, successful stablecoins, a form of private money, could even contribute to cement the “exorbitant privilege” of the U.S. public money, the dollar, and strengthen the role of its underlying “safe asset,” U.S. government bonds.
Against such backdrop, the introduction of a digital euro appears to be much more than the pet project of a few central bankers that want to step into private payment systems. It is one way to weatherproof the single currency. Of course, if European leaders genuinely believed that recent developments pose such a threat to the euro area and its economy, they would also overcome their resistance to talk about the need to issue a truly common European safe asset. To be sure, a digital euro is one way to offer a European response to the digitalization of Europe’s financial system. However, the best way to ensure the currency area’s long-term viability is to overcome resistance against pooling more resources. If the single currency area was able to issue its own truly safe asset at scale, able by virtue of its existence to assert a leading role for the single currency, surely the whole debate over a digital euro would be much less controversial than it currently is.
