Phase One of the digital euro has been completed

– Central bank money for everyone –
“No one has the intention of . . . . . “

Status: 10/23/2023

Contribution from Prof. Dr. Dirk Meyer

Determined but without haste – the European Central Bank (ECB) is advancing the introduction of the digital euro. The process began in October 2021 as an investigation phase, exploring a possible design and provision of a digital format. Last week, the ECB Council decided to enter a preparatory phase for an e-euro, which is also designed to last for two years. In this phase, the regulatory framework will be developed and providers will be selected for the development of a platform and the necessary infrastructure. Additionally, the application of digital money will be tested to ensure that the outcome "meets the requirements of the Eurosystem as well as the needs of users, for example regarding user experience, data protection, financial inclusion, and ecological footprint" (ECB press release). However, its introduction is by no means certain. Because it is not only the ECB that plans and designs. A legal basis from the EU is needed, which the European Commission has already presented with the "Draft Regulation on the Introduction of the Digital Euro" in June (JF 28/23). This must be approved by the EU Parliament and the EU Council after several rounds of discussions. Finally, in some member states, national parliaments must also agree. Therefore, both processes – legislation and design of the e-euro – are running in parallel to avoid unnecessary delays. Bundesbank President Joachim Nagel is optimistic that "we will be able to pay with the digital euro in about five years".

How does the e-euro work?

The e-euro would create a third form of money alongside cash and scriptural money (see graphic). Conceptually, the e-euro is a digital form of cash that – alongside banknotes and coins – can be used as legal tender for all payment transactions in the euro area. For this purpose, a digital central bank account, managed by commercial banks, will be set up for each user, which the user can access with their so-called electronic wallet (“Wallet”) as an app on their smartphone or computer. The actual payment process should be possible online and offline, so that the latter can also be used relatively anonymously and with limited internet connection. Later on, a digital euro money card is also planned. As a form of central bank money, the e-euro would, like banknotes and coins, be failure-safe, because the scriptural money in the accounts of commercial banks is subject to insolvency risk. This argument, also put forward by the ECB, is hardly sustainable in light of the deposit protection up to 100,000 euros, as a limit of 3,000 euros for the e-euro is being discussed. A relatively low upper limit is generally considered necessary for financial stability in times of crisis, as otherwise, a shift of bank deposits into central bank money would occur. However, whether a 'bank run' occurs via a mouse click or by withdrawing cash is at best a logistical difference for the ECB if it must decide to support banks. In both cases, it would have to provide central bank money in advance for the struggling commercial banks. However, banks would lose a part of their business. In particular, their ability to lend would be severely restricted, as they need central bank money for this, which would now be tied up by the e-euro. Who could take this over? The generally proven division of tasks between the private sector and central banks would be lost, without closing the gap. That is also why the umbrella organization 'German Credit Industry' advocates for a “lower three-digit euro area.”

Do citizens even need a digital legal tender?

For Peter Bofinger, a member of the Council of Economic Experts until 2019, the answer in his expert report for the Austrian major bank 'Erste Group Bank AG' is clear: The digital euro is as unattractive as non-alcoholic wine, as there are no relevant advantages over existing electronic payment providers. Ignazio Angeloni, former ECB director, names a possible motive: “We have experienced something that Americans call 'fear of missing out' – the fear of not being part of it and being considered technologically backward.” After all, different central banks are rehearsing similar things – not always successfully, as the lack of acceptance of the Chinese e-yuan shows.

Advantages and Disadvantages of the E-Euro

The e-euro is promoted with the claim of being free of charge, as consumers would not pay any fees when using digital money. Since the newly established infrastructure for the payment system naturally incurs costs and merchants have to pay for it, the costs are passed on to the customer – only they do not notice it explicitly. The e-euro is often mistrusted as an instrument for actively displacing cash and controlling citizens. “No, cash and the digital euro would coexist. A digital euro would complement cash but not replace it,” says the Bundesbank. In fact, a draft regulation is currently being discussed in the EU, stating that the payee may not refuse “euro banknotes and/or coins offered to fulfill a payment obligation.” However, exceptions are provided: money laundering thresholds and ‘ex-ante exclusions’ by visibly placing the notice “No Cash” at a business or location. This would be disproportionate, however, for large retail chains. Accordingly, the difference to the current situation is hardly noticeable. Although the ECB guarantees that it “cannot access personal data and … cannot draw conclusions about individual persons based on payment information,” the e-euro requires the use of an account. Only the offline variant would correspond roughly to the anonymity of cash. Additionally, the e-euro is not supposed to be programmable to restrict its use, implement sanctions lists, or reduce its value. However, as it was said on June 15, 1961, “No one has the intention of ...!” The prerequisites would be given.