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“It is imperative for the ECB to introduce a digital euro”, said Philip Lane, the European Central Bank’s chief economist, in a recent speech. Earlier last month Paschal Donohoe, president of the Eurogroup of finance ministers, spoke of a “heightened level of urgency” in progressing to a digital currency. Take heed. These remarks show that even as Donald Trump’s tariffs take up most of Europe’s attention, some Europeans are alert to the next geoeconomic front: a US push to shore up its dominance of international payments.
They are right to be concerned. Among Trump’s flurry of executive orders is one promoting the worldwide use of privately issued “stablecoins” denominated in US dollars. There is every reason to expect him to put muscle behind it. His administration is stacked with people deeply involved in the payments technology business, such as Elon Musk (who first hit it big with PayPal) and Howard Lutnick (who has ties to stablecoin issuer Tether). These disrupters may not see eye-to-eye with the old governing elite about much, but they agree on the power and profit to be had from retaining US control over global payments.
That system is on the cusp of huge change, for both political and technological reasons. The weaponisation of the dollar-based financial system — note how the US has cut off access by adversaries to Swift messaging for bank transfers — has prompted quests for alternatives. Ideas include a currency and payments system run by and for Brics countries. Technologies such as stablecoins offer an instant, cheap and 24/7 alternative to the expensive, slow and cumbersome legacy of correspondent banking.
So the fight for domination of the future payments system is on — and the US wants to win. The broader European public may be blissfully unaware. But those in charge of the Eurozone are also determined that this battle for technological control over the economy is one that the EU must not lose. This is the fundamental motivation for the digital euro — a central bank-issued official digital currency that, if done well and fast enough, will rival or outperform the attractiveness of dollar stablecoins.
Without it, Europe faces dangers we have known about for some time — since Facebook’s ill-fated 2019 proposal for its “Libra” electronic currency. Even before that, Europe discovered that when Trump placed sanctions on Iran, Europe could not act autonomously because it was so hard to process trade payments without US-exposed banks.
The fact is that the Eurozone is already shockingly dependent on American payment mechanisms. Some two-thirds of card payments in the Eurozone are processed by non-European card providers, says the ECB; 13 of the 20 countries using the euro do not have national card-payment systems. In those cases, “when you go to buy milk, it’s either [physical] cash or Visa/Mastercard”, as one European central banker puts it. This dependence is replicated in the rapid spread of mobile apps.
If US stablecoins gain widespread usage, the ultimate risk is “digital dollarisation”, where sales platforms encourage buyers and sellers to price, transact and keep balances in such tokens. This undermines a central bank’s control of domestic monetary conditions.
All this is ignored by those who belittle the digital euro project as a solution in search of a problem. But the signs are that their ranks are diminishing. So far, the digital euro project is defensive, necessity being the mother of invention, but it is welcome. Also overdue, however, is recognising the positive arguments for the digital euro. One is the simple idea that if a domestic digital payment technology, practically free, can replace fee-charging foreign payments providers, it is tantamount to removing a transaction tax on economic activity in and with the Eurozone.
Another is that a digital euro could compete with dollar stablecoins for international business. How to link it up to non-euro currencies is already being looked into by the ECB. But it must go further. The retail model currently being contemplated, with a limit in the low thousands on how much can be held in digital euro wallets (to avoid users abandoning banks), will not serve the business need for smooth payments along cross-border supply chains, for example.
But the most important benefit is that a digital infrastructure for automated digital contracts — payment “rails” whose safety is guaranteed by the central bank — creates a whole new tech economy. Compare it to the way that smartphones brought the app economy into being. Beyond autonomy, this is an opportunity for Europe to make up its lag in tech innovation. The time for a digital euro is now.