The concept of a digital euro is rapidly moving from theory to reality, yet its fundamental purpose remains ambiguous. Proponents argue that it could enhance financial security, expand access to banking services, and bolster geopolitical independence. However, the sheer variety of justifications raises a critical question: is any single argument compelling enough to warrant its creation?
In this article, I detailed the legal framework and implementation proposals for the digital euro. This piece explores the issues the Central Bank Digital Currency (CBDC) aims to address and evaluates the risks and challenges such a project entails. A subsequent article will delve into the potential negative implications in greater detail.
Finding First Problem: Financial Inclusion
A frequently cited benefit of the digital euro – a form of central bank-issued electronic money – is improved access to financial services. As the economy becomes increasingly digitalized, the demand for electronic payment options grows. The declining use of cash, currently the only means of payment issued directly by the ECB, calls for an electronic alternative to physical currency.
Yet, this rationale is undermined by the steady reduction in the number of unbanked Europeans. In 2017, over 8% of the population lacked access to banking services; by 2021, this figure had dropped to below 4%, thanks to innovative solutions offered by private sector players. The market has shown itself capable of providing effective electronic payment options without central bank intervention.
Even in developing economies, where financial inclusion is a more pressing issue, CBDCs have failed to gain traction. The Nigerian eNaira, launched in 2021 to address limited access to financial services, has been used by only 0.5% of the population, contrary to initial hopes. If a CBDC cannot succeed in a context where the need is greater, its necessity in Europe is even more questionable.
The European Commission touts the digital euro’s cost-free nature as its key advantage. Yet, research by the Cato Institute suggests that the primary reason many Americans avoid financial services is not cost but lack of interest or trust in the system. Privacy concerns and systemic mistrust may similarly deter Europeans. Moreover, the proposed framework for the digital euro requires users to open accounts through existing financial intermediaries, leaving little reason to believe that those distrustful of the banking system would find the digital euro any more appealing.
Finding Second Problem: Speed of Payments
Fragmentation of the euro area payment system is another issue digital euro advocates highlight. Before the euro’s introduction, individual countries operated distinct financial systems, some of which persist and hinder the single market’s efficiency. Physical borders still limit the seamless functioning of digital payment platforms in both retail and e-commerce.
However, significant progress has been made in this area without the need for a CBDC. The SEPA (Single Euro Payments Area) Instant Credit Transfer system, launched in 2016, enables account-to-account transfers within 10 seconds across 36 participating countries (all 27 countries of the European Union, plus 9 other countries). This demonstrates that private-sector collaboration can yield rapid and efficient cross-border payment solutions.
Fintech companies have also revolutionized digital payments, offering low-cost, user-friendly platforms with features like budget tracking, bill splitting, and QR code scanning, and receiving information about payments that have just taken place. These innovations have emerged without central bank involvement, proving that the private sector can effectively address payment speed and convenience.
The unification of the Euro area payment system is already underway, driven by market dynamics rather than central bank intervention. The digital euro would merely duplicate existing instruments without addressing the underlying reasons some consumers avoid electronic payments, such as low technological literacy or a lack of motivation, still having to download an app and learn how to use the technology. Thus, the digital euro risks becoming a redundant addition to Europe’s payment landscape.
Finding Third Problem: Strengthening European Independence
A third justification for the digital euro is reducing dependence on non-European payment platforms like Visa and Mastercard, which dominate the euro area. For example, non-European, international card schemes account for more than two-thirds of all electronic payments in the euro area, with 13 out of 20 Euro area countries fully reliant on these schemes. Frustration with this reliance has spurred calls for a European alternative, particularly as cryptocurrencies and foreign CBDCs challenge the euro’s global standing.
However, the focus should not be on resenting foreign success but on identifying barriers to European innovation in this area. If excessive regulations stifle the development of competitive European platforms, the solution lies in regulatory reform, not in introducing a state monopoly via the central bank. Furthermore, if consumers are content with existing American platforms, there is little reason to believe they would embrace a digital euro.
Conclusion
The purported benefits of a digital euro – financial inclusion, faster payments, and European independence – are largely addressed by private-sector initiatives. Principles of sound policymaking dictate that public intervention should occur only when private solutions are insufficient. In the case of the digital euro, this principle appears to have fallen on deaf ears. Rather than creating a potentially redundant CBDC, European policymakers should focus on fostering an environment that encourages financial innovation and addresses real, unmet needs in the marketplace.
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