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03/28/2024

Who Wants the Digital Euro?

Researchers assess the actual benefits of the ECB's planned digital currency

Michael Frenkel - March 28, 2024

Bank transfers, payment services and cryptocurrencies – there are already numerous ways to pay digitally and securely. Another one could soon be added: the digital euro. After the European Central Bank (ECB), together with the central banks of the EU member states, carried out an investigation phase for the electronic means of payment, the preparatory phase for a possible introduction has been underway since November 2023. A decision is still being made on whether to enter the implementation phase, which is expected to last three years. So far, however, the focus has been on whether and how it is technologically feasible to introduce the digital euro. Researchers have now examined whether a digital euro would have any advantage at all for users compared to existing payment methods.

What is the digital euro?

The digital euro is an electronic means of payment issued by the ECB. It is intended to be a supplement to cash, which is also issued by the ECB, and can be used free of charge by every EU citizen. The digital euro is not a cryptocurrency. As central bank money it is very secure because it is backed by the ECB. In contrast, so-called bank account money is a claim against a private bank where the customer is dependent on the liquidity of the respective bank. The digital euro is supposed to be used throughout the eurozone as a digital means of payment in stores, online or between individuals.

What is the ECB's intention behind the introduction?

By introducing the digital euro, the ECB wants to strengthen its monetary sovereignty and its own currency. Not least due to the COVID-19 pandemic, people's payment habits have increasingly shifted from cash to digital methods. Some Scandinavian countries are even already on the way to a largely cashless society, and this trend is also continuing in other European countries. For the ECB, a digital central bank currency is therefore the next logical step.

Another reason why the ECB is in favor of its introduction is the increasing global strength of cryptocurrencies. In 2023, there were already around 10,000 cryptocurrencies with a combined market capitalization of 1.1 trillion euros – trend going upwards. This compares to euro banknotes and coins with a market capitalization of 1.6 trillion euros. In order to take account of the popularity of cryptocurrencies such as Bitcoin and to limit their increasing influence, there is a strong argument for the ECB to rely on digital central bank money itself. Additionally, there is a risk that the European traditional payment system will become less important as people increasingly use innovative and user-friendly payment services developed by international fintechs.

Does the digital euro really hold added value?

By now, it has become clear that the introduction of the digital euro is technologically feasible in principle, even if there are still unanswered questions regarding some of its design features. However, another important question has not yet been answered: does its introduction hold added value for consumers? People already have a wide range of digital payment options at their disposal, and new payment systems and cryptocurrencies are enjoying great popularity. For the considerable effort and costs involved in introducing a digital central bank currency to be worthwhile, a high level of demand would be required among EU citizens. However, the digital euro would have to offer additional advantages in terms of more convenience, higher returns, lower costs and risks, faster transactions or better data protection compared to existing payment systems. Whether this is the case, however, is still questionable.

In terms of convenience, no particular advantages are to be expected, as payments and transfers are already possible with existing bank cards and payment services in Europe. For cross-border transactions outside Europe, credit cards can usually be used without any problems. Furthermore, it is still questionable whether the digital euro will also be recognized as a means of payment outside the eurozone. There are also plans to make the wallet, in which the digital euro is to be stored, initially only available to people resident in the EU. 

If there is interest on deposits in a digital wallet, the digital euro offers an advantage over cash. However, commercial banks also pay interests, meaning that they would be in competition with the ECB. If the ECB were to grant interest on the digital euro, private banks would probably match or even exceed their interest rate on deposits, which would not make the digital euro any more attractive. If, on the other hand, the ECB does not pay interest when banks receive interest on their deposits at the ECB, this would result in unequal treatment that is difficult to justify.

In terms of transaction speed, the digital euro could offer private users an advantage, as it is to be expected that these payments could be made very quickly or even in real time. However, extremely fast payment services are already available for payments for goods and services. In contrast to the digital euro, these are also possible for payments to people outside the eurozone.

It is also expected that payments with the digital euro – where available – will be free of charge, whereas banks and digital payment services often charge fees, especially for transactions outside the eurozone. Nevertheless, the ECB will incur costs for transactions in the international environment and for the introduction of the digital currency. Although users of the digital euro would be able to transfer money more cheaply than before, taxpayers in the EU would indirectly have to pay for the ECB's expenses.

Concerning the risk, the digital euro could offer users a decisive advantage because it represents a direct claim against the central bank and not against a private bank, which could become insolvent. However, the balances of private bank customers are also protected by the statutory deposit guarantee up to an amount of 100,000 euros. In addition, the digital wallet at the ECB will initially be limited to 3,000 to 4,000 euros, which means that there is no additional protection compared to deposits at private banks. 

How the digital euro performs in terms of data protection is controversial. Compared to private banks, where all transactions are registered and stored, the currency reduces the risk of unauthorized access to private data. However, a digital currency is never as anonymous as using cash and opening a digital wallet with the ECB – just like opening an account with a private bank – would require personal data to be deposited. It remains to be seen whether EU citizens have enough trust in the central bank to protect their private data in such financial transactions.

The digital euro offers its potential users only partial and limited advantages over payment service providers or accounts with private banks. It is therefore doubtful whether demand will be high after its possible introduction. However, as the introduction of the digital currency is also linked to political objectives and work on the technical details of the digital euro is already well advanced, it is to be expected that it could soon be introduced as a new means of payment.

Literature reference

- Frenkel, M. (2023): Will the Digital Euro Be Attractive Enough to Generate Significant Demand?, in: Vierteljahrshefte zur Wirtschaftsforschung, Vol. 92 (2023), Iss. 3, pp. 23–36. DOI: doi.org/10.3790/vjh.92.3.23

Author of the study

Professor Michael Frenkel

Professor Michael Frenkel is Associate Dean for International Relations and Professor of Macroeconomics and International Economics at WHU – Otto Beisheim School of Management. He is also the Director of the Center for EUropean Studies (CEUS) at WHU. His extensive international experience stems from working for several years as a consultant with the International Monetary Fund and from visiting professor positions held at Harvard University among others. Professor Frenkel also worked as a consultant to the World Bank and the European Commission. For many years, he was responsible for the economic education of young German diplomats with the Ministry of Foreign Affairs. Professor Frenkel has more than 100 publications in the fields of macroeconomics and international finance, and he serves on the editorial board of the Global Finance Journal, the International Journal of Business, the Journal of Economics and Statistics, and the Journal of Markets and Ethics.

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