Paschal Donohoe is the Eurogroup president and the Minister for Public Expenditure, National Development Plan Delivery and Reform of Ireland.
In recent years, the pace of innovation and change in the financial and payments sector has been exponential. We can now make payments, transfer money, and invest by using tools that didn’t even exist a few years ago. And between 2019 and 2022, the share of euro area mobile payments more than tripled in both number and value.
These new technologies can benefit both consumers and companies, enabling greater access to financial services, offering more choices and increasing the efficiency of operations. But they also raise important questions about how to regulate them to safeguard our financial stability and protect consumers.
We have seen the emergence of cryptocurrencies from private actors and the concept of Central Bank Digital Currencies (CBDCs) take hold globally. In this context, we need to consider how best to ensure our common currency — the euro — can keep pace with these developments and continue to meet the needs of our citizens and businesses. Hence, the possibility of the digital euro.
For many observers, the central question is: What makes a digital euro any different, or better, than the many innovative digital solutions already available? And the answer to this lies in “central bank money” — or “fiat currency.”
The term “fiat currency” is used to refer to deposits held at central banks and cash brought into circulation by central banks, which only central banks can create. Customer deposits held at commercial banks aren’t considered central bank money, nor are existing forms of digital payments. What European Central Bank (ECB) monetary policy does instead is maintain price stability and keep the value of our common currency stable, so that citizens have a social contract “guarantee” that they will retain their purchasing power.
This differs from cryptocurrencies and stablecoins. Their stability and reliability ultimately depends on the issuing entity, and on the credibility and enforceability of their pledge to maintain value over time — when there’s no identifiable entity liable, claims cannot be enforced.
So, at the heart of the digital euro project is the objective to maintain the link between citizens and central bank money. For as a CBDC, the digital euro would be central bank money, convertible, one-to-one, with euro banknotes.
This conversation around a digital euro, which began in earnest when the ECB launched its investigation in 2021, has quickly moved from being a possibility to a probability. And while a final decision on whether to launch won’t be made for several years, it’s increasingly looking like a case of not if but when.
The ECB investigation is now running parallel with the European Commission’s preparations for undertaking the necessary legislative process. And as soon as the Commission publishes its proposal — which we expect to come in May — the co-legislation process will begin and, crucially, national parliaments will undertake their usual role of overseeing European Union legislation.
Meanwhile, euro area finance ministers have been part of this reflection process since the start, representing the views of European citizens. And thus far, as the Eurogroup, we have discussed many of the key issues associated with a digital euro, including privacy and the trade-offs with other policy objectives like countering terrorist financing and preventing money laundering, the possible business models of intermediaries, and any potential implications for the financial system. We have published the summaries of these discussions, as well as a statement outlining the agreed Eurogroup positions on the digital euro, in the name of transparency.
It’s important to note that while the move toward cashless payments continues, cash still plays an important role, and all involved in this project are clear that a digital euro won’t replace cash. Rather, it would be another way to make payments, responding to citizens’ and firms’ developing preference for making them digitally.
Central banks have a mandate to maintain the value of money — independent of its physical or digital form — and by introducing a euro CBDC, the aim is to protect the value and sovereignty of our common currency and ensure it cannot be supplanted by a digital currency from another jurisdiction or a private company.
To succeed, the digital euro will need to ensure and maintain users’ trust — and for this, privacy is both a key dimension and a fundamental right. The digital euro should be safe and resilient, it should be easy and convenient to use, and it should be widely accessible to the public.
To prevent negative consequences for the financial sector, a digital euro should be mainly used as a means of payment and not become an instrument for financial investments. And supervised intermediaries — similar to the banks and payment service providers we have now — should be involved in its handling.
The ECB isn’t alone in considering digital currency either — all major central banks are currently examining the possibility of issuing a CBDC, and the Eurosystem is collaborating with other central banks to understand the implications of issuing a digital currency. There’s a common understanding at the G20 level that cooperation will be needed when it comes to international use, and the G7 already has agreed principles on CBDCs.
Nonetheless, it is vital that a euro CBDC is designed with the specificities of the EU in mind. So, what happens next?
In the autumn, the ECB Governing Council may decide to move to a “realization” phase, where it would develop and test technical solutions and business arrangements necessary to eventually provide and distribute a digital euro. Only after these steps — and only after the European Parliament and the Council of the EU have adopted a legislative act — would a decision be taken to issue a digital euro or not.
These are exciting and fast-moving times, and as we embrace the opportunities brought about by digitalization, we promise that we will continue to engage with citizens. All can rest assured that the key political decisions on the digital euro will be made by elected representatives, and they will be in the best interest of Europeans.
