The European Central Bank (ECB) is accelerating plans for a digital euro, a move that transcends a mere technological upgrade and is increasingly viewed as a geopolitical imperative. The initiative aims to significantly cut the European Union’s dependence on US-based payment giants like Visa and Mastercard, as well as digital wallets such as Apple Pay and Google Pay, thereby strengthening the bloc’s economic sovereignty in an unpredictable global landscape.
Currency Sovereignty in a Shifting World
In an era where trade rules can be abruptly altered and tariffs imposed overnight by external powers, EU policymakers see currency sovereignty as a crucial safeguard. The current reliance on US payment infrastructure means that global transactions, if predominantly dollar-denominated, could undermine the effectiveness of the ECB’s monetary policy on the traditional euro. Bas van Donselaar, managing partner at PaymentGenes Consultancy, told DW, “If globally all those transactions become dollar-denominated without a digital euro, it would limit the effectiveness of ECB monetary policy on the traditional euro.”
As online trade and payments grow, and foreign digital currencies gain traction, a digital euro would empower the ECB to better manage the money supply, respond to economic crises, and shield the euro from external shocks. This strategic pivot mirrors efforts by other major economies; China’s digital yuan (e-CNY) has seen substantial adoption since its pilot in 2020, with over 230 million personal and 18.8 million corporate wallets created. By late November, the e-CNY had processed over 3.48 billion retail transactions valued at approximately 16.7 trillion yuan ($2.4 trillion, €2.1 trillion), according to Xinhua news agency. Beijing is actively expanding its cross-border use and even offering interest on digital yuan savings.
Protecting Europe’s Financial Stability
A primary challenge for the digital euro lies in preventing it from functioning as a direct substitute for bank accounts, which could trigger a flight of deposits, particularly during financial crises. “If there is no limit on how many digital euros people can hold, it becomes like a substitute for bank accounts,” warned Emmanuelle Auriol, professor of economics at the Toulouse School of Economics. To mitigate this risk, the ECB has proposed safeguards, including a potential cap on digital euro holdings, possibly around €3,000 ($3,420), with excess amounts automatically redirected to a linked bank account. Furthermore, the digital euro would not accrue interest, removing a key incentive for consumers to move savings from traditional banks. Companies would also be restricted from holding substantial permanent balances.
Privacy Without Surveillance
Privacy concerns are paramount for consumers, with some fearing that a central bank digital currency (CBDC) could enable state surveillance of spending, drawing parallels to China’s social credit system. However, Auriol dismissed such comparisons, stating, “Social credit systems (as in China) have nothing to do with this.” She emphasized that “Privacy protections can be balanced with anti-crime measures without creating social control tools.” The ECB plans to facilitate peer-to-peer payments directly between devices, aiming to preserve a degree of cash-like anonymity for everyday transactions while adhering to anti-money laundering regulations. Evelien Witlox, director of the Digital Euro at the ECB, described the proposed currency as “a secure, public option for digital payments, combining the ease and convenience of modern payment methods with the trust and stability of cash.”
Getting Banks Onboard
A significant hurdle for the digital euro’s rollout is the potential impact on European banks’ revenue streams. Currently, merchants incur fees on card transactions, typically ranging from 0.5% to 1.5%, which are split between banks and payment processors. The digital euro is intended to lower these costs. Many retail banks argue that they will bear the primary responsibility and cost for building and operating the new infrastructure, while losing a substantial source of fee income. Consequently, lenders are advocating for higher user holding limits and fair compensation. “The balancing act between compensation models for banks and merchants is crucial,” van Donselaar noted. “While lower acceptance fees for merchants are understandable, banks will do most of the work and should have a viable business model as well.”
Consumer Adoption Made Easy
To foster widespread public acceptance, the ECB proposes granting the digital euro legal tender status across the eurozone. Under current proposals, merchants with payment terminals would be obliged to accept digital euros at face value without additional fees for consumers. “Like physical banknotes, its value would be backed by the Eurosystem — the European Central Bank and national central banks — so one digital euro will always equal one regular euro. Unlike cryptocurrencies, its value is stable and will not go up and down,” Witlox explained. Non-euro EU countries would have the option to adopt the currency. The digital euro is also designed to function offline, offering utility during power outages or in areas with limited connectivity. The European Parliament’s Economic and Monetary Affairs Committee recently approved its position on the regulation, advancing negotiations towards a legal framework expected later this year, with a pilot planned for 2027 and a potential full launch in 2029.
