It is rare for EU member states to agree unanimously on some critical issues that can potentially improve most Europeans’ lives. However, the European Commission’s decision to launch the digital euro proposal alongside the European Central Bank in October 2023 is one example of an initiative that aims to cater to about 350 million Europeans.
Put simply, a digital euro is a central bank digital currency. The digital euro would be treated as legal tender like banknotes within the euro area. It aims to reinvent central bank money, cash and coins in a digital form.
The number of online transactions using plastic cards or mobile apps is increasing exponentially. In Malta, using cash for payments was traditionally among the EU’s highest. There are various reasons for this phenomenon but things are changing. ECB data confirm that between 2022 and 2024, the use of cash for retail transactions was reduced by 10 per cent in Malta, one of the most significant declines in the Union.
Some analysts argue that the digital euro is not much of an innovation because today, most consumers can access private digital money through credit and debit cards. So, when the digital euro becomes a reality, would it immediately become redundant given the vast supply of private digital monies available, including bank deposits, credit cards, electronic money and mobile applications?
In reality, monetary stability and the smooth functioning of the payment system ultimately depend on everyone widely accessing and using government guarantees of sovereign money. The digital euro would have the same level of safety as banknotes, which people are always happy to accept.
Understandably, many have great expectations for the digital euro, even if its launch will take a few more years of legislative and regulatory work by the ECB and the various EU institutions.
Joachim Nagel is the president of the Deutsche Bundesbank. In a recent business meeting, he argued that the digital euro could benefit all parties. For consumers, it offers a digital means of offline and online payment that is safe, free and usable throughout the euro area. Banks can use the digital euro as a base for innovation and need not fear deposits migrating to the digital euro because users will not earn interest on digital euros as there will be a maximum holding limit.
The digital euro would have the same level of safety as banknotes, which people are always happy to accept
Merchants will be one of the biggest beneficiaries. Nagel argues that today, retailers often feel obliged to offer customers various payment solutions, some of which are quite expensive. The digital euro would increase competition in the payments market. Merchants could negotiate lower transaction fees with private payment service providers.
The digital euro would complement other existing digital payment solutions. With relations between the EU and the US at an all-time low, the ECB wants to reduce Europe’s dependence on international card schemes dominated by US companies like American Express, Visa and Mastercard. This is a way to strengthen the global role of the euro as well as Europe’s ‘open strategic autonomy’.
A central bank digital currency differs from crypto-assets in many ways. Most digital currency projects use Distributed Ledger Technology and/or blockchain.
Despite the initial narrative around the digital euro being closely linked to blockchain, Fabio Panetta, who leads the ECB’s digital euro work, has recently commented that blockchain technology is unlikely to have the processing power to support the digital euro aims to serve about 350 million Europeans. Put simply, the risks associated with central bank currencies are much more contained than for crypto-assets with significant credit and liquidity risks.
Another significant advantage of the digital euro is its ability to promote financial inclusion, which still affects millions of Europeans. A digital euro accessible to all European citizens would foster financial inclusion by offering digital payment means for those excluded from the banking sector either because of restrictive bank policies or the complex processes for onboarding new clients.
While it may take up to 2028 for the digital euro to become a reality, expectations for the benefits it will offer ordinary citizens are understandably great. People’s confidence in private money is underpinned by its convertibility on a one-to-one basis with the safest form of money in the economy – central bank money.
Private digital money issuers must rely on convertibility, as their money is exposed to operational, credit, liquidity and market risk. Conversely, central bank money in the form of physical banknotes or digital currency is intrinsically guaranteed by the state and, in the case of the euro, by the ECB.
