The digital euro is the project of the European Central Bank (ECB), decided in July 2021, for the possible introduction of a central bank digital currency (CBDC).

The aim is to develop a fast and secure electronic payment instrument that would complement the euro for individuals and businesses in its existing form as cash and in bank accounts, and would be issued by the European System of Central Banks of the Eurozone. After concluding a two-year investigation into the design and distribution models for a digital euro, the ECB decided on 18 October 2023 to enter the preparation phase, which involves tasks such as finalizing the rulebook and selecting providers to develop the required platform and infrastructure, setting the stage for the potential issuance of a digital euro. Arguments and motives for the introduction of a digital euro are, according to the ECB:

• Preserving central bank money’s role as a monetary anchor for the payment system.
• Provide free digital access to a secure legal tender in the Eurozone
• Expanding payment options through alternative central bank money alongside cash and book money in commercial bank accounts, contributing to availability and inclusion
• Building trust in digital cash through a high level of privacy protection
• Promote innovation in retail payments
• Limiting the spread of foreign digital currencies to safeguard the financial stability and monetary sovereignty of the Eurozone
• Wealth redistribution and social aid would be greatly simplified.

In addition to these motives, the possibility of a further decline in the use of cash as a means of payment plays a role in the discussion on the digital euro. Criticism and risks of the digital euro:

• Increased centralisation and central planning of monetary policy
• Loss of privacy
• Risk of financial censorship and loss of human rights
• Hacking and information security issues
• Higher risks of loss of central bank independence and political influence on monetary policy
• Potential for much faster transmission of bad monetary policy
• Risks to banking system of bank runs towards CBDC
• Distribution fairness issues (Cantillon effect)
• Higher political control of individual spending and saving
• Weakened Property Rights

While Christine Lagarde has publicly addressed some of these risks, critics consider her responses inadequate. Critics point to the digital Renminbi CBDC and how it has experimented with many of the right-restricting features (including geo-fencing, geo-tracking, amount limits, time limits, etc). They also point to the e-naira and Venezuelan Petro and their monetary policy issues. Similarly de-banking issues and financial censorship have been on the rise in recent years, critics fear that a centrally planned, centrally controlled and managed system would have the potential for a much higher level of censorship and discrimination by authorities. The prototype developed by the ECB as part of the investigation phase includes conditional payments, this points to the potential for programmability of the digital euro and thus similar risks to individual rights as in the digital renminbi. According to the Human Rights Foundation, CBDCs risk imposing sweeping financial surveillance, restriction of financial activity, frozen funds, seizure of funds, negative interest rates, tools for corruption, cyberattack risks and disruptions to financial stability. The European Commission has submitted a legislative proposal for the introduction of a digital euro that should be made available as a legal tender not only to banks, but above all to the general public. Presented on 28 June 2023, this proposal outlines the fundamental requirements for its possible implementation. However, the final decision lies with EU member states and the European Parliament, who are currently —12 November 2024— negotiating this proposal. If the legislation is approved, the ECB will further develop the technical and operational aspects, aiming to create a secure and reliable digital euro, available alongside cash and traditional bank payment accounts. Additionally, the proposal aims to protect user privacy, similar to cash, without extra oversight of individual transactions by the governments. For security purposes, there are considerations for limits on the amount individuals can hold in digital euros. All of this forms part of a preparatory phase that may take several years, with an expected implementation date from 2028 if the legislation is approved.

Links:
Preparations for the possible introduction of a digital euro

Digital euro – ECB

Digitaler Euro: Souveränitätsdrang und ein “glitschiger Fisch” im EU-Parlament