The ECB’s Digital Euro Risks Becoming a Costly Illusion
The ECB’s plan could duplicate private solutions, burden taxpayers, destabilise banks, and breach the EU ban on financing member states’ public debt. A commentary by Lorenzo Bini Smaghi
Last week, the Chairman of the Eurogroup, Pascal Donahue, stressed the “determination to advance on the very important project of the digital euro”. Given that the project of the digital euro has been on the ECB’s agenda for several years now, one can only be surprised by the vagueness of the statement, which may conceal its controversial nature and the high risk of failure. For several reasons.
First, the digital euro already exists in practice. It is issued by the private sector and already offers most of the features envisaged by the European Central Bank, though the ECB’s version will not be delivered before the end of this decade. Private payment solutions enable cheap person-to-person payments, 24 hours a day, seven days a week.
They are based on European payment infrastructures and ensure full European sovereignty, as all issuing banks are regulated and supervised in Europe.
However, as is often the case in Europe, fragmentation across national borders remains a problem.
Existing digital euros, issued by European banks, can be used for retail transactions within but not across member states. This is due to different national functional solutions and limited acceptance.
For instance, Bizum in Spain and MBWay in Portugal already cover many of the features of the future digital euro foreseen by the ECB. Wero is a cross-border solution promoted by the European Payment Initiative, bringing together banks from Germany, France, the Netherlands, and Belgium.
Achieving a truly European digital payment solution will require these private-sector initiatives to converge and achieve full interoperability. The current promoters in the various countries are working together with the aim of finalizing a common platform by the end of 2027. At that point, it is unclear what additional benefit the consumer could derive from a central bank-issued digital euro.
Second, the central bank project is likely to be more expensive and less efficient than the private-sector solution.
For example, the private digital euro will be multi-currency and usable throughout the EU, whereas the ECB’s digital euro is designed as a single-currency instrument.
In general, the private sector has strong incentives to innovate and continuously improve the services it provides its customers, since retail payments are core to their business — unlike central banks.
This intuition is confirmed by the fact that most central banks have abandoned their digital currency projects. The only exception is the People’s Bank of China — even though its digital currency is largely outpaced by private issuers like Alipay and WeChat Pay.
Third, the digital euro project poses a significant cost to taxpayers. No estimates have been provided — neither for the completion of the project nor for its operation. Costs will be shifted to the private sector, especially banks and merchants, but these would ultimately be passed on to end-users.
Fourth, there is a high risk of financial instability, with strong repercussions for the real economy. A large-scale shift into central bank digital euros would reduce bank deposits, forcing banks to scale back loans to households and businesses. This would not be the case with a private digital currency.
At the same time, a rising use of the central bank digital euro would expand the ECB’s liabilities, which would need to be matched by additional high-quality assets.
The ECB would therefore have to increase its holdings of government bonds — exactly the opposite of what it is currently attempting with Quantitative Tightening. In practice, the digital euro would push the central bank to increase its financing of member states’ debt.
This is probably why the Council of Ministers now wants to have a say in determining the size of the digital euro wallet. Indeed, the larger the wallet, the larger the ECB’s balance sheet. It is not by chance that the ECB initially proposed a ceiling of 3 thousand euro per wallet, while now some politicians want to raise it up to 5 or 10 thousand euro. Under these conditions, the ECB could risk losing control of the monetary base.
This is perhaps the greatest concern of all. Granting EU Governments the right to decide on the monetary base would breach the prohibition of financing public debt, enshrined in the Maastricht Treaty. If this were allowed, an appeal to the German or European Constitutional Court would be unavoidable.
Finally, the central bank digital euro does not address the real threat to Europe’s monetary sovereignty: the growing use of dollar-denominated stablecoins.
It is surprising that so many eminent policymakers, academics, and private-sector actors still fail to grasp the difference between an electronic money, like the digital currency, and a token, like the stablecoin, which represents the greatest threat to sovereignty.
To sum up, rather than trying to replace or compete with the private sector, the European monetary authorities should follow what their peers are currently doing: use their moral suasion to ensure that European banks quickly deliver efficient and interoperable solutions for the digital euro.
That would be the best starting point to safeguard European monetary sovereignty.
A first version of this article was published in the Italian daily Il Foglio
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
