Introduction
Europe is placing high hopes on the development of a “euro digital” currency, as physical cash’s role in bank deposits and financial confidence diminishes in the digital era. The European Central Bank (ECB) aims for this digital euro to not only replace cash in everyday transactions but also bolster Europe’s strategic autonomy amidst a global financial landscape dominated by the US dollar and private American payment systems like Visa, Mastercard, and PayPal.
The Euro Digital’s Objectives
The euro digital is envisioned as a complement to physical cash, not an alternative to bank deposits. It will be distributed by commercial banks but redeemable through the central bank, ensuring legal tender status. Users can make online purchases and send money quickly and efficiently using their smartphones, just like cash. However, the euro digital will not offer any interest and wallet limits are set at 3,000 euros (approximately $3,500).
Limited Corporate Transactions
Despite its potential, the euro digital is unlikely to significantly impact corporate transactions or liquidity management. The real difference in strengthening Europe’s strategic autonomy will come from major wholesale transactions, not retail ones.
ECB’s Initiatives
The ECB plans to expand the euro digital’s role in wholesale transactions by linking its central registry system with future wholesale payment systems, likely based on distributed ledger technology (DLT). Two programs have been announced: Pontes, a shorter-term initiative to bridge private DLT platforms with the ECB’s existing centralized TARGET Services, and Appia, a more ambitious project to create an integrated financial ecosystem “prepared for the future” based on DLT.
Limited Impact on International Transactions
While these initiatives will enable the ECB to act as a primary counterparty in various exchanges, including interbank monetary market transactions, it’s unlikely that Pontes and Appia will substantially increase the euro’s participation in international transactions or foreign exchange reserves. The primary goal is to match the speed and efficiency of US dollar transactions.
Stablecoins: A Potential Game-Changer
Stablecoins, digital assets pegged to traditional currencies or commodities, could act as an alternative to bank deposits. Although the euro digital is expected to function similarly to cash, stablecoins might provide the required flexibility. The ECB’s Appia program does not commit to creating a euro-based stablecoin but lays the groundwork for its development. With favorable regulations, stablecoins could combine the speed and efficiency of digital payments with bank deposit security.
Regulatory Landscape
Recent legislation in both the US and Europe, such as the GENIUS Act and MiCA, mandate that stablecoin issuers hold sufficient high-quality, liquid assets to fully back their tokens. However, this requirement alone is insufficient during crises when asset values may plummet, triggering mass withdrawals similar to bank runs but without a central bank as a lender of last resort.
Geopolitical Implications
The US Federal Reserve’s potential support for stablecoin issuers, contrasting with the ECB’s reluctance, could lead to a dominant position for US dollar-based stablecoins. This would further entrench the US dollar’s global dominance, limit EU payment autonomy, and potentially make the ECB reliant on Fed liquidity during crises—undermining its monetary policy independence and increasing capital costs.
Conclusion
In a rapidly evolving technological and geopolitical context, the ECB may be compelled to choose between adapting its stance on stablecoins and risking further dependence on the US dollar.
Key Questions and Answers
- What is the euro digital currency? The euro digital is a proposed central bank digital currency (CBDC) designed to complement physical cash, ensuring legal tender status for digital euros distributed by commercial banks but redeemable through the European Central Bank.
- What are the ECB’s initiatives regarding euro digital? The ECB has launched two programs: Pontes, aiming to bridge private distributed ledger technology (DLT) platforms with its existing centralized TARGET Services, and Appia, striving to create an integrated financial ecosystem based on DLT.
- How might stablecoins impact the euro digital’s success? Stablecoins, if regulated favorably, could offer an alternative to bank deposits and potentially enhance the euro digital’s appeal. However, without proper safeguards during crises, stablecoins could lead to increased reliance on US dollar-based alternatives.
- What are the geopolitical implications of stablecoin adoption? A dominant position for US dollar-based stablecoins could further entrench the US dollar’s global dominance, limit EU payment autonomy, and potentially make the ECB reliant on US Federal Reserve liquidity during crises.
Author: Lucrezia Reichlin, former Banco Central Europeo research director and professor of Economics at the London Business School.
Copyright: Project Syndicate, 1995 – 2025
Website: www.project-syndicate.org
