Is the digital euro coming?
The European Central Bank is working on an electronic version of the single currency Digital Euro. At the same time, it ensures that the funds are not at risk. Whether that will happen is not yet certain – but work on a digital euro is steadily progressing. The decision is expected to be taken in autumn 2023. However, it will likely take until 2026 before citizens can spend euros electronically.
Expectations are high. This is how Federal Finance Minister Christian Lindner promoted the project on Twitter:
We should use the introduction of the digital euro to make a big leap in innovation.
Digital money will advance if it can be programmed and linked to innovative applications from private providers.
The European Central Bank and the European Commission see the transition to a digital currency as a major step forward, which should modernize European monetary policy and standardize payments to citizens.
Most already pay electronically
It is not easy to understand what the ECB is planning. After all, Germans already do most of their business electronically: through online banking, postcards or cell phones. Money is used less and less.
This is also a problem for the central bank, as money in citizens’ wallets is an important part of the EU’s legitimacy.
One can understand the digital euro project as a move against Bitcoin or Facebook’s failed Libra initiative, which was to put private money into circulation.
The central bank is happy with the failure of cryptocurrency
In fact, central bankers are quite happy that largely unregulated cryptocurrencies have suffered a critical setback in 2022 with multiple bankruptcies and price crashes.
However, the real competitors are Mastercard, Visa, Google Pay and Apple Pay. Because all the companies that process a large part of our electronic financial transactions are based outside the European Union, as the President of the European Central Bank, Christine Lagarde, pointed out.
Banks must not become redundant
To compete with digital companies, the ECB wants central bank money to be made available to citizens in the future. Because until now most of the money in citizens’ accounts has been created through banks.
While these deposits are secured by deposit protection funds and regulations, the ECB itself is responsible for central bank funds. Therefore, the digital euro should be as secure as fiat currency.
However, the ECB does not want to make banks unnecessary. Current plans foresee that each citizen will receive a limited amount of digital euros and that access will continue through banks. Therefore, calculating the salary will not become redundant.
Cash flows must be monitored
Central bankers also want to prevent abuse: money laundering and illegal transactions must be prevented by monitoring the flow of money. Small private transactions should not be recorded.
The project stokes residents’ fears that the cash could be abolished. Populist parties, in particular, harbor such fears, fueled by the debate over pay limits.
That’s why the ECB is constantly trying to address these concerns. In a report on the digital euro, the central bank promises:
The euro system will continue to supply banknotes and allow them to be used as long as there is demand.
It remains to be seen whether there will be real demand for a digital euro in the future.