Digital euro still a long way off as caution prevails

A digital currency, utilising the same technology as a crypto currency but backed by a central bank, has a particular appeal in the eurozone. It could overcome the delays and costs of cross-border transactions. But the Eurogroup of finance ministers foresees several years of tackling practical and political problems, with no guarantee of eventual approval, writes Political Editor Nick Powell.

After the most recent meeting of the now 20 finance ministers whose countries use the Euro (Croatia joined on 1 January), the Eurogroup President Paschal Donohoe said that following 18 months of very detailed discussions they had taken “some time to reflect” on the idea of a digital currency. The European Central Bank had narrowed down the possible technical designs and would decide by the autumn whether to take the process further.

This would be the ‘realization phase’, a term that is not meant to imply that the digital Euro would actually get the go-ahead. It would however take three years, suggesting that a digital currency will be technically feasible only by the end of 2026. In parallel, the European Commission is continuing preparatory work on legislation that would put a digital Euro on a proper legal basis.

The root of all this caution is concern amongst finance ministers and central banks about potential threats to financial stability and central bank sovereignty over monetary policy. Those factors seem to outweigh in their thinking the benefits of faster and less costly cross-border payments, which are estimated to cost $130 billion globally.

Of course, the international payments system could be improved, if only between countries that use the Euro, without introducing a digital currency. But agreement on an EU-wide standard might be easier to achieve when introducing something new. Meanwhile, volatility in crypto-currencies leaves the ministers and bankers feeling confident that they don’t risk a mass exodus from their regulated, if sometimes inefficient systems.

So what’s the next step for the Eurogroup? As Paschal Donoghue put it, “what the Eurogroup recognised today is that many decisions that await are inherently political”, so clearly asserting its continuing control of the process and of the eventual outcome. “I want to acknowledge the recognition by the Commission and the ECB of our mandate in this area”, he added.

In a separate statement, the Eurogroup stressed the need to preserve money issued by central banks as an anchor of the monetary system. It also outlined requirements that cash should be complemented, not replaced, by a digital currency; also that privacy rights be protected, while simultaneously upholding measures to tackle money laundering, illicit financing, tax evasion and sanctions busting.

There would need to be limits on the amount individuals and businesses could hold in digital form and other restrictions aimed at safeguarding the financial stability of the Euro area. Even if everything was in place to launch a digital currency, the time would still have to right; “implementation should take into account the prevailing economic and financial environment”, was how the Eurogroup’s statement put it.

It is hard to avoid the conclusion that the finance ministers rather wish that the concept of a digital currency still didn’t exist. But it does and later this year the Commission is expected to propose legislation to the Parliament and Council. An even longer and more labyrinthine process than usual is likely to follow.

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