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European Commission and ECB to launch a digital euro project

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Are you ready to use a ‘digital wallet’? For the uninitiated, this refers to a virtual currency that is meant to be a complement to the cash in peoples’ wallets. Eurozone central bankers are leaning towards a rollout of the so-called digital euro later this year. The digital euro will be an electronic form of central-bank money, meant to be accessible to all. The new payment instrument is just one part of a revolution currently taking place in the sometimes shadowy world of crypto currencies.

These range from crypto and stable coins to crypto tokens.

European Union finance ministers hope to steal a march on the rest of the world with the unofficial launch, possibly as early as the spring, of a digital euro.

This, in part, aims to counter the Diem project, a single dollar-backed digital coin. Diem, which means “day” in Latin,  is backed by social media giant Facebook and 26 other companies who plan to launch the payments service this year.

EU political figures have urged speedy action to match China and other central banks who are also considering virtual versions of their money.

The digital euro is a complex project that would facilitate payments but could also shake the foundations of the financial system. It would also take on the U.S. dollar’s global influence in the sector.

A digital euro aims to be a supplement to, not a substitute for, physical cash and does not imply that banknotes and coins will disappear.

It aims to take account of digitalisation, rapid changes in the payments landscape and the emergence of crypto-assets.

Debate about a digital euro, though, has put the focus firmly on the issues around cryptocurrencies.

Facebook was  one of the first out of the blocks with its announcement last summer of the project to launch its own digital currency (initially named Libra but since renamed Diem)

Some central banks, including Sweden and China, are now working on digital versions of their own currencies.

The commission and ECB hope to launch a digital euro project towards the middle of 2021.

“Such a project would answer key design and technical questions and provide the ECB with the necessary tools to stand ready to issue a digital euro if such a decision is taken,” the two institutions say in a joint statement. 

A Commission spokesman said a range of “policy, legal and technical questions” were still be addressed.

The ECB launched a public consultation on the introduction of a digital euro as a central bank digital currency in November 2020. This is designed to be  a chance for people to express their priorities, preferences and concerns about the issuance of a digital euro as a central bank digital currency and means of payment in the euro area.

Fabio Panetta, a member of the ECB’s Executive Board, recently wrote to MEP Irene Tinagli, chair of the Committee on Economic and Monetary Affairs (ECON) in the European Parliament, about the matter.

This coincided with Panetta’s recent hearing before the committee following the publication of the Euro system report on a digital euro. The public consultation closed on 12 January 2021 and generated a particularly impressive response.

Panetta says the response reflects the growing interest in an issue that, until recently, has been on the periphery.

He said: “I am pleased to say that 8,221 citizens, firms and industry associations responded to the online questionnaire, a record for ECB public consultations.

“The high number of responses to our survey shows that Europe's citizens, firms and academics are keenly interested in shaping the vision of a digital euro. The opinions of all stakeholders are of utmost importance to us as we assess the need, feasibility and risks and benefits of a digital euro.”

The Italian says a digital euro would “combine the efficiency” of a digital payment instrument with the “safety” of central bank money.

“The protection of privacy would be a key priority, so that the digital euro can help maintain trust in payments in the digital age.”

He said: “We will now analyse in detail the large number of responses.”

An initial analysis of raw data shows that privacy of payments ranks highest among the requested features of a potential digital euro (41% of replies) followed by security (17%) and pan-European reach (10%).

The ECB board member cautioned: “The public consultation was designed to be open to everyone without restrictions. At the same time, given its nature and the fact that respondents answered the questionnaire of their own free will and were not selected on the basis of any particular criteria, data gathered through the consultation were never intended to be representative of the views of the EU's population as a whole and should not be interpreted as such."

The ECB, said the official, will continue to analyse the responses and publish a “comprehensive” analysis of the consultation in the spring which “will play an important role” in helping the ECB Governing Council decide whether or not to launch a digital euro project.

He said: “I very much look forward to reporting the details of the analysis on this important topic in the spring.”

So, what are the perceived benefits of a digital euro?

Well, one potential advantage is that savers, for example, could see more benefit in holding digital euros than depositing their cash in accounts, which can come with fees and offer little return at current rates.

A digital euro could, additionally, facilitate payments across Europe and offer the opportunity to every euro area citizen to have a deposit account in the perceived safe hands of the ECB.

 But several outstanding issues remain to be settled, including the technology that would power the digital euro.

Another issue is the level of privacy, one of the top concerns raised in the ECB’s public consultation.

The recently published Euro system report on a digital euro stated that "a digital euro could support the digitalisation of the EU’s economy and its strategic autonomy", especially when it comes to correspondent banking for international business.

It also describes two approaches to how a digital euro might work: one that requires intermediaries to process the payment and one that doesn’t.

The ECB explained: “If we design a digital euro that has no need for the central bank or an intermediary to be involved in the processing of every single payment, this means that using a digital euro would feel closer to cash payments, but in digital form – you would be able to use the digital euro even when not connected to the internet, and your privacy and personal data would be better protected.”

It says the other approach is to design a digital euro with intermediaries recording the transaction. This would work online and allow broader potential for additional services to be provided to citizens and businesses, creating innovation opportunities and possible synergies with existing services.

Senior Member of the European Parliament Stéphanie Yon-Courtin, Vice-Chair of the influential ECON committee, spoke to this site about the digital euro, saying: "As for every project related to the digitalisation of our economy, the digital euro should be built with innovation, consumer protection, and financial stability in mind.”

The French RE member added: “I trust the ECB's expertise in striking this delicate balance."

In the meantime, the Commission and ECB will continue their cooperation on a digital euro and pursuing their efforts towards “ensuring a strong and vibrant European digital finance sector and a well-integrated payments sector to respond to new payment needs in Europe.”

ECB president Christine Lagarde said: “We are still in the review and consideration stage, but we’ve just completed a public consultation so that consumers and Europeans can actually express their preference and tell us whether they would be happy to use a digital euro just in the way they use a euro coin or a euro banknote, knowing that it is central bank money that is available and that they can rely upon.”

The French born official added: “We have received a mine of information which we are currently processing. It is only in Spring, probably in April, that we will determine whether or not to go ahead with the work that will need to be done.

“My hunch, but this is a decision that will be taken collectively, is that we might well go in that direction,”

Lagarde cautioned, though that she sees at least a five-year timeline as a “feasible timeline” for a digital euro.

“This is a complicated issue that has to be resolved without disrupting the current financial scene nor jeopardising monetary policy decisions.”

Further comment comes from Commission Executive Vice President Valdis Dombrovskis who said: “I think we need a digital euro. I can really say that this debate is ongoing and progress is being made in this direction.

“The ECB and European Commission will jointly review a broad range of policy, legal and technical questions and there are some design questions which we would need to answer. But we can see how digital euros can be used in international payments.”

Leo Van Hove, a professor of monetary economics at the Solvay Business School at Vrije University Brussels (VUB), is another who has given a guarded welcome to  a digital euro. He said the main attraction of the digital euro, if and when it happens, lies in its risk-free nature.

As emphasized by Lagarde, a core role of the ECB is to secure trust in money. Unlike commercial banks, a central bank cannot go bust, as it can create money out of thin air.

He says that if the digital euro is to become an effective new monetary policy instrument  then the “holding limits” cannot be too tight.

“If the ECB really only wants to be a 'payment service provider of last resort' and, in this way, maintain the intermediation function of banks, Euro system officials clearly face a difficult – and strange – balancing act.”

In order to tackle such policy, legal, and technical challenges, the ECB and the European Commission set up on 19 January a joint working group to facilitate the preparatory work.

Last October, the ECB also presented its study on the issue to the ECON committee.

German MEO Markus Ferber, who is the EPP Coordinator in the European Parliament’s Economic and Monetary Affairs Committee explained: “I rather have a digital Lagarde-Euro than a Zuckerberg-Libra. In sensitive areas such as payments, we need to keep central banks in charge and not private consortia, as is the case with Facebook’s Libra.”

Ferber noted: “The ECB’s presentation last autumn also made clear that there are still numerous challenges to be overcome before a digital euro goes live - with safety, financial stability and data protection, the list is long.”

Ferber told this website: “The ECB has to make a very strong case about the actual added value of a central-bank sponsored digital currency. Digital central bank money is not an end in itself. One thing must be very clear though: a digital Euro can only complement cash as a means of payment and must not replace it.”

While we're all used to the idea of digital currency - spending and receiving money that isn’t physically in front of us – cryptocurrencies - digital, decentralized currencies that uses cryptography for security - still remain something of a mystery to most.

Aside from a digital euro, there are crypto coins such as bitcoin which continues to trade close to its all-time high reached in January. Its price is now over US $57,000, up about 77% over the past month and 305% over the past year.

First launched in 2009 as a digital currency, Bitcoin was for a while used as digital money on the fringes of the economy.

Bitcoin is still used and is very actively traded on cryptocurrency exchanges, which allow users to swap ‘ordinary’ money like euros for bitcoins.

Bitcoin is the original cryptocurrency and accounts for over half of the $285 billion global coin trading market. But that dominance is under threat, with a host of alternative digital coins emerging as developers race to build cryptocurrencies able to enter mainstream commerce and finance.

There are also crypto tokens such as LGR Global’s Silk Road Coin (SRC). This is an innovative blockchain-powered technology solution, called a utility token, which is used to access a suite of next-gen trade finance and money-movement services within LGR’s secured digital business enviroment.

LGR Global’s founder and CEO, Ali Amirliravi explained to EU Reporter the business case for using a utility token such as the SRC rather than Bitcoin for international cross border trade:

“The value fluctuations that we are seeing in the market right now makes Bitcoin very interesting for investors and speculators, however for business clients looking to quickly and reliably transfer value cross-border, these fluctuations can cause complications and accounting headaches. What the trade finance industry is really looking for is a way to leverage the benefits of digital assets (i.e. speed, transparency, cost), while hedging against uncertainty and value fluctuations. LGR’s secure business environment harnesses the power of the SRC blockchain utility token and combines it with a single fiat currency pair (EUR-CNY) in order to offer our clients the best of both worlds”

Additionally, there are stable coins such as America’s USDTether. Unlike many digital currencies, which tend to fluctuate wildly against the dollar, Tether is pegged to the US currency.

This is supposed to protect investors from the volatility that can affect Bitcoin, Ethereum, Ripple and Litecoin. Tether is the ninth-biggest cryptocurrency by market capitalization, with coins worth around $3.5 billion in existence.

Not to be outdone China is inevitably also pioneering its own digital Yuan, a payment system created by the Chinese state and known as Digital Currency Electronic Payment (DCEP).

Like Bitcoin, DCEP utilises a blockchain technology, a type of digitised ledger used to verify transactions. Blockchain acts as a universal record of every transaction ever made on that network, and users collaborate to verify new transactions when they occur.

While China has not offered a timetable for an official launch of the DCEP, the country’s central bank, is aiming for a wider test of the digital yuan before the start of the 2022 Winter Olympics, scheduled to take place in Beijing next February.

One other class of cryptocurrency that is proving to be very popular and perhaps stands a better chance at becoming more popular than physical currency are so-called ‘stable-coins’, that is cryptocurrencies whose value is linked to ‘normal’ currencies like the US dollar, the euro and the pound, so that unlike Bitcoin, one unit can’t be worth £26,000 one year, and £6,000 two years later.  Some controversy surrounds such currencies, though. For example, an Israeli crypto-currency trading company, CoinDash, reporting that $7m  was stolen from investors last July after its website was breached and an initial coin offering's contact address altered and a South Korean exchange, Yapizon, was breached in April with hackers suspected of stealing about $5m worth of funds

Like any fast developing space mushrooming with new technologies, there are higher quality cryptocurrencies and lower quality ones.

Whether cryptocurrency becomes more popular than physical currency in the future remains to be seen but, speaking to EU Reporter, Dutch MEP Derk Jan Eppink, said, "Central Bank Digital Currency, or CBDC, raises a fundamental question about the role of a central bank. Certainly, the digital euro would provide consumers with a digital claim on the central bank that is as safe as cash. 

"But on the other hand, with the issue of CBDC commercial banks would lose an essential source of funding and would have to rely increasingly on bonds or central bank credit for funding."

Looking to the future, the European Conservatives and Reformists deputy declares, "Let us hope that the call from Benoît Cœuré for a “monetary Hippocratic oath” will serve us all."


Economy

NextGenerationEU: Four more national plans given thumbs up

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Economy and finance ministers today (26 July) welcomed the positive assessment of national recovery and resilience plans for Croatia, Cyprus, Lithuania and Slovenia. The Council will adopt its implementing decisions on the approval of these plans by written procedure.

In addition to the decision on 12 national plans adopted earlier in July, this takes the total number to 16. 

Andrej Šircelj, Slovenia’s Minister for Finance said: “The Recovery and Resilience Facility is the EU’s programme of large-scale financial support in response to the challenges the pandemic has posed to the European economy. The facility’s €672.5 billion will be used to support the reforms and investments outlined in the member states’ recovery and resilience plans.”

Reforms and investments

The plans have to comply with the 2019 and 2020 country-specific recommendations and reflect the EU’s general objective of creating a greener, more digital and more competitive economy.

Croatia plans to implement to reach these goals include improving water and waste management, a shift to sustainable mobility and financing digital infrastructures in remote rural areas. 

Cyprus intends, among other things, to reform its electricity market and facilitate the deployment of renewable energy, as well as to enhance connectivity and e-government solutions.

Lithuania will use the funds to increase locally produced renewables, green public procurement measures and further developing of the rollout of very high capacity networks.

Slovenia plans to use a part of the allocated EU support to invest in sustainable transport, unlock the potential of renewable energy sources and further digitalise its public sector.

Poland and Hungary

Asked about delays to the programmes of Poland and Hungary, the EU’s Executive Vice President for the economy Valdis Dombrovskis said that the Commission had proposed an extension for Hungary to the end of September. On Poland, he said that the Polish government had already requested an extension, but that that might need a further extension. 

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Economy

EU extends scope of general exemption for public aid for projects

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Today (23 July) the Commission adopted an extension of the scope of the General Block Exemption Regulation (GBER), which will allow EU countries to implement projects managed under the new financial framework (2021 - 2027), and measures that support the digital and green transition without prior notification.

Executive Vice President Margrethe Vestager said: “The Commission is streamlining the state aid rules applicable to national funding that fall under the scope of certain EU programmes. This will improve further the interplay between EU funding rules and EU state aid rules under the new financing period. We are also introducing more possibilities for member states to provide state aid to support the twin transition to a green and digital economy  without the need of a prior notification procedure.”

The Commission argues that this will not cause undue distortions to competition in the Single Market, while making it easier to get projects up and running.  

The concerned national funds are those relating to: Financing and investment operations supported by the InvestEU Fund; research, development and innovation (RD&I) projects having received a “Seal of Excellence” under Horizon 2020 or Horizon Europe, as well as co-funded research and development projects or Teaming actions under Horizon 2020 or Horizon Europe; European Territorial Cooperation (ETC) projects, also known as Interreg.

Projects categories that are considered to help the green and digital transition are: Aid for energy efficiency projects in buildings; aid for recharging and refuelling infrastructure for low emission road vehicles; aid for fixed broadband networks, 4G and 5G mobile networks, certain trans-European digital connectivity infrastructure projects and certain vouchers.

In addition to the extension of the scope of the GBER adopted today, the Commission has already launched a new revision of the GBER aimed at streamlining state aid rules further in light of the Commission priorities in relation to the twin transition. Member states and stakeholders will be consulted in due course on the draft text of that new amendment.

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Agriculture

Putin's drive to tame food prices threatens grain sector

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Ears of wheat are seen on sunset in a field near the village of Nedvigovka in Rostov Region, Russia July 13, 2021. REUTERS/Sergey Pivovarov
A combine harvests wheat in a field near the village of Suvorovskaya in Stavropol Region, Russia July 17, 2021. REUTERS/Eduard Korniyenko

During a televised session with ordinary Russians last month, a woman pressed President Vladimir Putin on high food prices, write Polina Devitt and Darya Korsunskaya.

Valentina Sleptsova challenged the president on why bananas from Ecuador are now cheaper in Russia than domestically-produced carrots and asked how her mother can survive on a “subsistence wage” with the cost of staples like potatoes so high, according to a recording of the annual event.

Putin acknowledged high food costs were a problem, including with “the so-called borsch basket” of basic vegetables, blaming global price increases and domestic shortages. But he said the Russian government had taken steps to address the issue and that other measures were being discussed, without elaborating.

Sleptsova represents a problem for Putin, who relies on broad public consent. The steep increases in consumer prices are unsettling some voters, particularly older Russians on small pensions who do not want to see a return to the 1990s when sky-rocketing inflation led to food shortages.

That has prompted Putin to push the government to take steps to tackle inflation. The government’s steps have included a tax on wheat exports, which was introduced last month on a permanent basis, and capping the retail price on other basic foodstuffs.

But in doing so, the president faces a tough choice: in trying to head off discontent among voters at rising prices he risks hurting Russia’s agricultural sector, with the country’s farmers complaining the new taxes are discouraging them from making long-term investments.

The moves by Russia, the world’s top wheat exporter, also have fed inflation in other countries by driving up the cost of grain. An increase in the export tax unveiled in mid-January, for example, sent global prices to their highest levels in seven years.

Putin faces no immediate political threat ahead of parliamentary elections in September after Russian authorities carried out a sweeping crackdown on opponents linked to jailed Kremlin critic Alexei Navalny. Navalny’s allies have been prevented from running in the elections and are trying to persuade people to vote tactically for anyone apart from the ruling pro-Putin party even though the other main parties in contention all support the Kremlin on most major policy issues.

However, food prices are politically sensitive and containing rises to keep people broadly satisfied is part of Putin’s longstanding core strategy.

"If the price of cars goes up only a small number of people notice," said a Russian official familiar with the government's food inflation policies. "But when you buy food that you buy every day, it makes you feel like overall inflation is going up dramatically, even if it is not.”

In response to Reuters’ questions, Kremlin spokesman Dmitry Peskov said the president was opposed to situations where the price of domestically produced products “are rising unreasonably.”

Peskov said that had nothing to do with the elections or mood of voters, adding it had been a constant priority for the president even prior to the run up to elections. He added that it was up to the government to choose which methods to combat inflation and that it was responding both to seasonal price fluctuations and global market conditions, which have been impacted by the coronavirus pandemic.

Russia’s economy ministry said that the measures imposed since the start of 2021 have helped to stabilise food prices. Sugar prices are up 3% so far this year after 65% growth in 2020 and bread prices are up 3% after 7.8% growth in 2020, it said.

Sleptsova, who state television identified as from the city of Lipetsk in central Russia, didn’t respond to a request for comment.

Consumer inflation in Russia has been rising since early 2020, reflecting a global trend during the COVID-19 pandemic.

The Russian government responded in December after Putin publicly criticised it for being slow to react. It set a temporary tax on wheat exports from mid-February, before imposing it permanently from June 2. It also added temporary retail price caps on sugar and sunflower oil. The caps on sugar expired on June 1, the ones for sunflower oil are in place until Oct. 1.

But consumer inflation - which includes food as well as other goods and services - has continued to rise in Russia, up 6.5% in June from a year earlier -- it’s fastest rate in five years. The same month, food prices rose 7.9% from the previous year.

Some Russians see the government’s efforts as insufficient. With real wages falling as well as high inflation, the ratings of the ruling United Russia party are languishing at a multi-year low. Read more.

Alla Atakyan, a 57-year old pensioner from the Black Sea resort city of Sochi, told Reuters she didn’t think the measures had been sufficient and it was negatively impacting her view of the government. The price of carrots "was 40 roubles($0.5375), then 80 and then 100. How come?" the former teacher asked.

Moscow pensioner Galina, who asked she only be identified by her first name, also complained about steep price rises, including of bread. “The miserable help that people have been given is worth almost nothing," the 72-year old said.

When asked by Reuters whether its measures were sufficient, the economy ministry said the government was trying to minimize the administrative measures imposed because too much interference in market mechanisms in general creates risks to business development and may cause product shortages.

Peskov said that "the Kremlin considers government action to curb price rises for a range of agricultural products and foodstuffs to be very effective."

FARMING FRICTION

Some Russian farmers say they understand the authorities’ motivation but see the tax as bad news because they believe Russian traders will pay them less for the wheat to compensate for the increased export costs.

An executive at a large farming business in southern Russia said the tax would hurt profitability and mean less money for investment in farming. "It makes sense to reduce production so as not to generate losses and to raise market prices," he said.

Any impact on investment in farming equipment and other materials likely will not become clear until later in the year when the autumn sowing season begins.

The Russian government has invested billions of dollars in the agriculture sector in recent years. That has boosted production, helped Russia import less food, and created jobs.

If farm investment is scaled back, the agricultural revolution that transformed Russia from a net importer of wheat in the late 20th century, may start to draw to an end, farmers and analysts said.

"With the tax we are actually talking about the slow decay of our growth rate, rather than overnight revolutionary damage," said Dmitry Rylko at the Moscow-based IKAR agriculture consultancy. "It will be a long process, it could take three to five years."

Some may see the impact sooner. The farming business executive plus two other farmers told Reuters they planned to reduce their wheat sowing areas in autumn 2021 and in spring 2022.

Russia’s agriculture ministry told Reuters that the sector remains highly profitable and that the transfer of proceeds from the new export tax to farmers would support them and their investment, therefore preventing a decline in production.

The Russian official familiar with the government's food inflation policies said the tax will only deprive farmers of what he called an excessive margin.

"We are in favour of our producers making money on exports. But not to the detriment of their main buyers who live in Russia," Prime Minister Mikhail Mishustin told the lower house of parliament in May.

The government measures could also make Russian wheat less competitive, according to traders. They say that is because the tax, which has been changing regularly in recent weeks, makes it harder for them to secure a profitable forward sale where shipments may not take place for several weeks.

That could prompt overseas buyers to look elsewhere, to countries such as Ukraine and India, a trader in Bangladesh told Reuters. Russia has in recent years often been the cheapest supplier for major wheat buyers such as Egypt and Bangladesh.

Sales of Russian wheat to Egypt have been low since Moscow imposed the permanent tax in early June. Egypt purchased 60,000 tonnes of Russian wheat in June. It had bought 120,000 tonnes in February and 290,000 in April.

Prices for Russian grain are still competitive but the country's taxes means the Russian market is less predictable in terms of supply and pricing and may lead to it losing some of its share in export markets generally, said a senior government official in Egypt, the world's top wheat buyer.

($1 = 74.4234 roubles)

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