Is Europe’s Digital Euro The Future Of CBDC Or Futile Effort?

By 2025, the European Central Bank may take the decision to launch its own Digital Euro, granting citizens direct access to central bank money in digital form for the first time. This initiative, pending legislative approval, aims to modernize Europe’s payment systems, reduce reliance on foreign providers, and preserve the euro’s global influence. Already second only to the U.S. dollar, the euro currently makes up about 20% of global foreign exchange reserves and 31% of foreign exchange market turnover.

Critics on both ends remain unconvinced. Some say the ECB’s cautious approach ducks systemic issues like entrenched banking power, while others view it as intrusive state meddling in a flourishing digital payments market. As the U.S. moves to ban a retail CBDC while China’s Digital Yuan sets transaction records, Europe’s Digital Euro finds itself caught between these two extremes. Can it deliver meaningful change, or will it remain an uneasy compromise?

To explore this dilemma, I interviewed Ulrich Bindseil, the ECB’s Director General of Market Infrastructures and Payments, and sought insights from leading economists and policy analysts.

ECB’s CBDC Vision

“The ever-increasing share of electronic payments forces us to evolve,” explains Mr. Bindseil. “We’ve long seen central bank money and private money coexist—why should central banks cling to antiquated methods now?”

The ECB envisions a secure, private Digital Euro—usable online or offline, accessed via wallets from banks or authorized intermediaries. Today, no single European digital payment system covers the entire currency bloc, leaving much of Europe dependent on non-European card networks. The ECB hopes the Digital Euro will reduce this reliance and bolster Europe’s strategic autonomy.

To avoid destabilizing the banking sector, the ECB plans to set holding limits and pay no interest on Digital Euro balances. This approach strikes a middle ground—offering a public digital currency without radically disrupting the financial banking landscape. A key goal is to offer a choice and assert Europe’s strategic autonomy in an increasingly digital economy.

On privacy, Bindseil is direct: “Neither the ECB nor any EU institution will hold individual user data. Payment service providers, not the central bank, will manage accounts. The offline version aims to be as anonymous as cash, ensuring we offer security and privacy, not a surveillance tool.”

Critics from Both Ends

Professor Dirk Niepelt of the University of Bern says the ECB could be bolder: “To become a true game changer, a retail CBDC would need to reduce the societal costs. These societal costs go beyond operational expenses. They also include the broader, economy-wide costs stemming from the problems caused by banks, which serve as the central payment service providers in today’s monetary system. Addressing issues like excessive bank market power, fragility, and too-big-to-fail problems requires significant resources—not required with a retail CBDC.”

Dirk also argues how a retail CBDC could address systemic issues and empower central banks to set interest rates directly, as envisioned by economists John Barrdear and Michael Kumhof in a 2016 Bank of England Working Paper. However, Professor Dirk admits the political-economy risks of expanding the central bank’s balance sheet. But Bindseil dismisses interest-bearing proposals due to fears of bank disintermediation and heightened run risks.

Meanwhile, skeptics like Nicholas Anthony of the Cato Institute see no genuine need for a retail CBDC. In Nicholas’s words, ”One of the biggest issues with CBDCs is they do not solve any problems that are not already being dealt with in the market. To the extent there are any benefits of CBDCs, those benefits rest in the hands of government officials seeking greater surveillance and control over how people use their money.”

Brunello Rosa, Honorary Visiting Professor at City, University of London, offers another view. “The Digital Euro could assert strategic autonomy,” he says, adding that it may spur innovation among banks. “Safe, public digital money can anchor trust in the broader digital asset ecosystem, allowing stablecoins and other private solutions to thrive alongside it.”

A Global Race

The ECB is navigating a complex landscape where nearly every G20 country is exploring a Central Bank Digital Currency. Of the 20 nations, 19 are in advanced stages of CBDC exploration, with 13 already conducting pilot programs. Prominent among these are Brazil, Japan, India, Australia, Russia, and Turkey, each testing their own digital currencies to streamline payments, and assert economic sovereignty.

China and the Digital Yuan

China is leading the CBDC race with its Digital Yuan, which has already surpassed $1 trillion in transactions. This rollout underscores China’s determination to establish a public digital currency as a cornerstone of its payment infrastructure, showcasing its ambition to create a state-backed payment systems. However, critics argue that the Digital Yuan could also functions as a tool for enhancing state surveillance, sparking debates about privacy and the appropriate balance between public and private roles in innovation, as well as individual freedoms.

Europe’s Cautious Approach

Europe’s cautious approach aims to achieve strategic autonomy without crowding out the private sector or compromising personal privacy. The Digital Euro is envisioned as a complementary public digital currency payment solution, designed to coexist with existing private payment systems. This strategy ostensibly seeks to ensure financial stability and reduce reliance on non-European payment networks. However, this measured stance has faced criticism from both ends of the spectrum—some argue it lacks the boldness necessary to make a significant impact, while others see it as an unnecessary intrusion into a domain better left to the private sector.

U.S. Stance and Global Implications

In stark contrast to many of its peers, the United States has opted to reject the introduction of a retail CBDC, citing concerns over privacy, financial stability, and the appropriate balance between public and private market roles. This decision places the U.S. in a distinctive position within the G20, where the majority of nations are actively advancing their digital currency initiatives. While proponents of this stance argue it avoids unnecessary government interference in an already competitive private payments market, critics warn that this approach risks leaving the U.S. behind in the global race for digital currency innovation and influence.

Strategic Autonomy

Europe’s approach aims to achieve strategic autonomy by reducing dependence on foreign intermediaries and non-European payment systems. However, by implementing holding limits and not offering interest on Digital Euro balances, the ECB intends to prevent bank disintermediation and maintain financial stability. Critics argue that this restraint may limit the Digital Euro’s competitiveness against established private payment solutions and hinder its ability to address deeper systemic issues within the financial sector.

The Path Forward

As major economies pilot CBDCs, Europe is to decide by 2025 whether to launch the Digital Euro or further facilitate a thriving private market, following the US approach. The current ECB’s strategy aims to integrate a public digital currency without significant disruption, but it remains uncertain whether this cautious approach can enable the Digital Euro to thrive amidst aggressive private global payment initiatives.

Success could enhance Europe’s financial autonomy and establish trust in the digital era. Failure, however, might render the Digital Euro an ineffective compromise—too timid to drive meaningful reform and too weak to compete on the global stage.

With the majority of G20 nations advancing their CBDC projects, Europe’s Digital Euro would need to navigate a delicate balance between public and private sector roles. While the ECB’s cautious strategy aspires to secure strategic autonomy and financial stability, it faces pressure to demonstrate its relevance and competitiveness. Only time will reveal whether the Digital Euro becomes a successful cornerstone of Europe’s financial future or an afterthought in the global digital currency race.