Key Points
- Digital Euro: The European Union (EU) is moving forward with plans to introduce a digital version of the euro, following the lead of several central banks worldwide.
- Proposal and Approval Process: The European Commission is set to publish a proposal that will serve as the legal framework for the European Central Bank (ECB) to potentially launch the digital euro. Formal approval by the ECB is expected in October, with plans for the digital currency to be available by 2027.
- Controversies and Challenges: The digital euro project faces criticism and challenges from various fronts. Banks warn of potential risks, such as bank runs and reduced bank balance sheets, while skeptics question the need for a digital euro altogether.
On Wednesday, June 28, AFP reported that the European Union (EU) is poised to take a significant stride towards the introduction of a digital version of the euro, despite facing criticism from the public, politicians, and banks even before its actual implementation.
Central banks worldwide, ranging from China to the United States, Jamaica to Japan, have been exploring or implementing digital currencies, as electronic payments increasingly dominate financial transactions and the use of physical cash declines.
Digital Euro
The initiative to develop a digital version of the euro was initiated in 2020 when Christine Lagarde, President of the European Central Bank (ECB), proposed the idea and the ECB launched a public consultation.
Advocates of the digital euro argue that it will complement physical cash and ensure that the ECB does not leave a void that could be filled by private entities, often non-European, or other central banks.
Critics question the necessity of a digital euro, and banks warn of significant risks. Additionally, the ECB’s internal study revealed that the public has concerns regarding payment privacy.
German MEP Markus Ferber expressed his skepticism, stating, “If we are simply duplicating the existing payment infrastructure with the digital euro, that is not a sufficient business case. At present, the digital euro appears to be a solution in search of a problem,” in an interview with AFP.
Proposal and Approval Process
On Wednesday, the European Commission, the EU’s executive branch, will release a proposal that will serve as the legal foundation for the ECB to potentially launch the digital euro. The final legislation will require approval from the EU’s 27 member states and the European Parliament.
Formal approval for the digital euro by the ECB is expected in October, with the currency anticipated to be available from 2027 onward.
A draft proposal seen by AFP indicates that the commission recognizes the “long-term benefits” of the digital euro, outweighing the associated costs, and cautions against the potentially significant costs of inaction.
The digital currency would be accessible to individuals residing in the euro area, as well as visitors.
Lagarde emphasized the importance of the digital currency for resilience and safeguarding European payment autonomy during a panel event in March. She noted that many of the existing means of payment are not necessarily European and expressed concerns about relying solely on a single payment source.
Visa and Mastercard, both American giants, currently dominate the global card payment market.
These remarks align with the EU’s broader objective of promoting production within or near the bloc and reducing dependence on third countries.
Controversies and Challenges
However, critics argue that the EU’s plans could pose challenges, particularly for banks.
The European Banking Federation (EBF) warned in March of the “significant risk for banks” due to the potential for bank runs if customers shift their funds to digital euro accounts and wallets, thus reducing the banks’ balance sheets.
The draft proposal includes a provision that will impose limits on the amount of money individuals can hold in digital euros, with ECB officials suggesting a cap of 3,000 euros ($3,300).
The commission also stated that the digital currency would be granted “legal tender” status, requiring it to be accepted as a form of payment. However, certain exceptions may be made, such as for small businesses that do not accept digital payments, as stated in the draft proposal.
Privacy concerns represent a significant challenge for the ECB in gaining public support for the digital euro. A public consultation revealed that privacy is the primary concern among Europeans regarding the digital currency.
To address these fears, the ECB has emphasized that it will not seek to control how individuals spend the digital currency or use it for surveillance, countering claims that such control exists in China.
“The ECB would not impose any limitations on where, when, or to whom people can make payments with a digital euro,” stated ECB executive board member Fabio Panetta in January.
According to the draft text, the commission intends to design the digital euro in a way that minimizes the processing of personal data by payment service providers and the ECB.
Credits: Photo by Maryna Yazbeck on Unsplash
