Can the digital euro actually find traction in Europe?

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The European Union launched the euro currency in 1999 as part of its ambitious plan to create a common European market. 

Now, in the digital age, European institutions are contemplating the creation of a digital euro — part of what the European Central Bank (ECB) calls “the next step in the advancement of our currency.”

The digital euro recently completed the investigation phase of a multipart plan from the ECB to determine the design and technical aspects of the proposed central bank digital currency (CBDC).

The project has now proceeded to the preparation phase, which the ECB aims to complete by October 2025.

While the digital euro is far from complete, it’s already creating discomfort for some EU citizens and politicians who view this transformation of their shared currency as a direct threat to their individual freedom. 

In February 2023, more than 1,000 demonstrators marched through the streets of Amsterdam to express their rejection of the digital euro. As reported in local media, some demonstrators were concerned about the possible privacy implications of a digital currency.

Despite the European Commission stating that the new money would have “the same level of privacy as cash,” distrust among European citizens and politicians is palpable.

Was die Künstliche Intelligenz mittlerweile alles möglich macht, zeigt dieser Thread. Dort spreche ich im Bundestag Englisch, Portugiesisch, Spanisch, Französisch, Indonesisch und sogar Chinesisch.

Wunderbar. Je mehr Menschen hören, dass #CBDCs gefährlich sind, desto besser.

— Joana Cotar (@JoanaCotar) November 10, 2023

While European authorities have issued a number of communications about the nature of a digital euro, there is still a great deal of speculation about its eventual design. 

According to recent surveys, citizens feel threatened by what surveillance powers governments could gain through a digital euro, while many others are simply not interested.

Is one of the most ambitious projects from the ECB threatening the fundamental freedoms of EU citizens? Or is this a matter of miscommunication that could be amended with the right arguments and education? 

Why does Europe need the digital euro?

The digital euro may have become a buzzword, but it is simply a digitally transacted euro at its core.

For the president of the ECB, Christine Lagarde, the digital euro will make the European currency “future-proof.”

The euro is key to our European unity. A digital euro, existing alongside cash, would future-proof our currency. It would be safe, easy to use and free of charge.

While the decision whether to issue a digital euro will be taken later, we’re now launching the preparation phase.

— Christine Lagarde (@Lagarde) October 19, 2023

For others, it is something far more profound that requires the European citizenry’s full attention. In a December 2023 speech, Fabio Panetta, governor of the central bank of Italy and executive member of the ECB until late 2023, compared the digital euro to the financial revolution in Italy in the early Renaissance, which created the foundation for the current banking system. Panetta concluded that the digital euro represents the next “pivotal point in the evolution of money.”

These high-level statements in favor of a digital euro may be too abstract for the average citizen to grasp, with more concrete arguments needed to convince Europeans. European authorities must clearly answer why European citizens need a digital euro.

Failure to make a clear case for the digital euro risks undermining the project before it comes to fruition.

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Stefan Berger, a German member of the European Parliament (MEP) and part of Germany’s Christian Democratic Union, told Cointelegraph that Europe needs the digital euro to keep up with other countries and regions around the world that are digitizing their economies and experimenting with digital currencies.

Berger said that “the popularity of crypto assets has certainly led central banks to develop digital currencies to ensure they remain relevant in the evolving digital financial landscape.”

He believes the digital euro must adapt as new technologies require new digital payment options. Berger emphasized how the euro needs its digital version for its survival:

“Without the digital euro, other digital central bank currencies and stablecoins could dominate the market.”

Maria Demertzis, professor at the European Univerisity Institute and deputy director of economic think-tank Bruegel, said that the ECB wants to create a digital euro to promote financial inclusion in Europe and to form a universal European payment method, reducing EU dependence on foreign service providers, as well as having a digital equivalent of cash in the digital age.

Cash is still king in Europe

European officials’ arguments for a digital euro on the grounds of convenience and financial inclusion are complicated by the continent’s cash-heavy payment system.

The COVID-19 pandemic may have propelled digital payments throughout the continent, but cash is still undoubtedly the most popular payment option.

As of 2023, 59% of total payments were settled with cash. While this overall percentage in the EU has been trending downward (as shown in the graph below), many of the 27 member countries still prefer cash.

Technology consultancy BearingPoint published a survey in late 2023 demonstrating that cash usage is significantly higher in Austria (79%) and Germany (71%) than in other European countries. Switzerland (63%), Ireland (61%), the Netherlands (57%) and France (55%) also show a relatively high level of cash use but are well behind Germany and Austria. Finland has a significantly lower frequency of cash usage at 43%. 

In addition to being a popular payment method, some see cash as a matter of necessity given the 5% of Europeans who are unbanked, numbering some 30 million people.

Indeed, European authorities have protected the use of physical cash. On June 12, 2020, the Spanish government introduced a law intending to prohibit cash. One day later, the ECB rapidly struck down the initiative, stating that eliminating cash in the EU is not permitted.

Concerns of a cashless Europe have led the ECB’s Lagarde to officially declare that the digital euro will “coexist alongside physical cash” and that cash “will always be available” with the intention of not “leaving no one behind.”

This insistence on the coexistence of cash and digital money raises questions about the efficacy of a digital euro.

Markus Ferber, MEP and member of the European People’s Party Group in the European Parliament, told Cointelegraph that there is no “major problem with a lack of financial inclusion in Europe.” He believes “the digital euro can only be more inclusive if it gets rid completely of the need to have a bank account.”

However, Berger said, “Physical cash is coined freedom. It will remain an integral part of society even in the age of digitalization […] no matter how far digitalization progresses, cash must never be at stake.”

Another issue complicating Europe’s digital vs. cash narrative is that cash is private, and people like privacy.

According to a 2022 ECB survey about consumer payment preferences, people using cash payments prefer the method because it allows them to preserve their privacy. Berger stressed how crucial this point is for a successful digital euro:

“A CBDC that does not ensure privacy and anonymity will never be accepted by the citizens and is therefore pointless.”

Joana Cotar, an independent member of the Bundestag, Germany’s parliament, told Cointelegraph, “Privacy is essential for personal autonomy and financial freedom, protecting individuals from surveillance and censorship.”

The digital euro offers geopolitical strategic autonomy

Another goal of the digital euro is to provide an autonomous European payments infrastructure.

In Europe, there is a plethora of payment services, but none of them work throughout the whole eurozone. For Ulrich Bindseil, director general of market infrastructure and payments at the ECB, “no true pan-European digital means of payment is problematic. This situation forces users who wish to pay digitally to rely solely on private (mostly non-European) payment providers.”

The digital euro package highlights the “strategic autonomy” it could offer to tackle the current dependency on foreign payment-related service providers.

For Bindseil, EU citizens would also benefit as a digital euro would offer European merchants a “competitive opportunity as it would put them in a stronger position to negotiate conditions with private payment solution providers, reducing their own costs” and possibly reducing prices for EU buyers. He added:

“A digital euro could be a catalyst for further innovation in the European payments sector.”

Conversely, Ferber doesn’t see a problem with the prevalence of private systems.

He highlighted how the European private sector is developing a solution to the issue with the European Payments Initiative, all with the participation of European authorities. He said he does “not want to see that the digital euro crowds out existing systems.”

Fear of the digital euro as a means of control

Ferber said that doubts about the digital euro are beginning to emerge in Europe, as “the proposed design features are quite minimalist. “That causes people to start asking questions about the added value” it can offer.

For Berger, “it is crucial that all open questions are addressed, with participation from all groups.”

Bindseil told Cointelegraph that the ECB welcomes “ongoing democratic debate on the digital euro.”

Bindseil believes the “Eurosystem has benefited greatly from feedback from European decision-makers, market participants and potential users.” He claimed that “all European institutions have to play their part to achieve our common goal of making the digital euro a success.”

Despite this apparent openness from politicians and institutes, many are still concerned about financial privacy. The ECB could hypothetically access every citizen’s financial records, as all payments would take place on a digital infrastructure provided by the central bank.

Cotar says, “Some argue that the digital euro could serve as a centrally planned and managed Trojan horse for total political control of citizens.”

Others worry that the ECB could use this data for other means, such as setting up a Chinese-style social credit system, the goal of which is to regulate social behavior and to rate the “trustworthiness” of Chinese citizens through actions like paying bills on time, abiding by the law and reporting financial data accurately.

For Ferber, these concerns are unjustified as “social scoring is not the purpose of this piece of regulation, and no one intends to go down that road.” He adds:

“Comparing the digital euro project to the CBDC that it is run by a dictatorship is not a valid comparison.”

But Cotar is not convinced. She tells Cointelegraph, “The concerns surrounding the potential misuse of the digital euro as a weapon of control are valid and warrant serious consideration.”

She referenced the example of the truck driver demonstration in Canada, wherein the Canadian government froze the bank accounts of truckers protesting official COVID-19 safety measures.

While the Federal Court of Canada eventually ruled that the government’s use of the national emergency law to stop the flow of funds and crypto to protesting truckers was unreasonable and unconstitutional, the incident demonstrated how governments might influence financial flows to political rivals.

Berger replied that “the two cases [China and Canada] have nothing to do with the ECB’s digital euro. We understand that criticism and concerns may arise due to the remaining open questions. Nevertheless, the digital euro is a voluntary offer. It is entirely up to individuals whether they choose to utilize it or not. The European Parliament, however, stands by the side of the citizens.”

The ECB’s Bindseil said that “the Eurosystem has no interest in people’s data or payment habits,” adding that “full anonymity would run counter to other public policy objectives,” as financial regulators would need to ensure compliance to combat money laundering and the financing of terrorism.

The ECB could ensure the privacy of the CBDC not by relying on promises from politicians but through technology, such as by launching the digital euro as an open-source CBDC to certify that no back doors exist.

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While Ferber said he was “not convinced that is necessary,” Cotar believes this is a positive path to ensure transparency and to minimize “the risk of backdoors in its coding,” Cotar said this approach may align with the core democratic principles of the EU:

“Open-source CBDCs align with principles of democratic governance and transparency, allowing citizens to hold regulators and central banks accountable for the design and implementation of the currency.”

Bindseil stressed that the digital euro “would not be programmable money.” He explained there would be an option to automate payment options, such as monthly rent, “but its use would never be restricted to a predefined purpose, like a voucher, with limitations on where, when or with whom people can use it.” He said this aspect has already been envisaged in the European Commission’s legislative proposal.

The digital euro has several lingering questions it needs to tackle before its launch. Citizens and politicians need reasonable solutions backed by solid arguments, and the digital euro needs to demonstrate a privacy guarantee, or it could fail to win the trust of European citizens.

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