Brief note to readers: apologies for posting a second article on the subject of central bank digital currencies in less than 24 hours, which is the result of lack of coordination between Curro and myself. That said, as NC reader Tom Dority notes in the comments thread to Curro’s excellent summary, this is one of the most consequential developments of this still young century — not that you would know that if you depended on legacy media for your daily diet of news and opinion. Any readers who are still unfamiliar with this topic should read Curro’s piece first.
The European Parliament wants a central bank digital currency. And it wants it as soon as possible, and in all its possible forms.
This was the big takeaway from the parliament’s plenary session on Wednesday in which it approved the inclusion of two amendments to the annual report on the activities of the European Central Bank (ECB). Those amendments, while not legally binding, represent a huge fillip for the architects of the Euro Area’s proposed central bank digital currency (CBDC).
MEPs consider the proposed digital euro “essential” in the current context of heightened geopolitical uncertainty and over-reliance on payment infrastructure from the United States, which is a much less reliable partner today. Per the first of the two amendments, the digital euro is considered key to bolstering the EU’s monetary sovereignty, reducing the fragmentation of retail payments and supporting the integrity and resilience of the single market.
The most surprising thing to come out of Wednesday’s session was the scale of support for the digital euro project. The text of the first amendment was approved by a massive margin of 438 votes in favour compared to 158 against and 44 abstentions.
The second amendment was arguably even more important for the future prospects of the proposed CBDC. The text emphasised that the “digital euro, both online and offline, must contribute to safeguarding universal access to payments and achieving broad acceptance by merchants throughout the Union”. In other words, it must be as universally accepted as cash.
MEPs even added a paragraph of their own to bolster the future use case for the digital euro:
“If the increasing digitalisation of payments is left exclusively in the hands of private agents and third countries, there is a risk of creating new forms of exclusion for both users and merchants.”
This clause, as I will explain later, is darkly ironic given the unparalleled exclusionary potential of programmable CBDCs. Needless to say, the second amendment was adopted with 420 votes in favour, 158 against and 64 abstentions.
While both amendments have no legislative impact, they send a clear message: when the European Central Bank and the European Commission present their final legislative framework for the digital euro, it will have no trouble getting approved.
The Final Hurdle
The reason this is important is that the European Parliament is the last regulatory hurdle facing the digital euro. The 20 finance ministers of the Eurozone member states have all backed the ECB’s digital euro plans, and like the overwhelming majority of MEPs, they want it as soon as possible, and in both of its possible forms (online and offline).
This did not seem like such a foregone conclusion just a few months ago. The European Parliament’s own rapporteur on the digital euro, Fernando Navarrete, a conservative politician from Spain appointed by the European Parliament to lead the parliament’s legislative push for a digital euro, had argued for a significantly scaled-down version of the project.
In his draft opinion, Navarrete had argued that the ECB and Commission should initially focus on launching a digital euro for money transactions between banks and large institutions (known in the trade as a wholesale CBDC) while the Euro Area’s commercial banks continue working on developing a bloc-wide instant payments system.
The ECB, he said, could also launch an offline digital euro for the general public. This would come in the form of a credit stored on a special device, presumably in card form or on a smartphone, that would allow members of the public to pay at the point of sale without an internet connection.
Navarrete argued that such a system should not depend on a central processing authority, therefore allowing for digital anonymous payments. Another potential advantage of an offline digital euro is that it would strengthen the resilience of the payment system in the event of power outages and payment system failures. Just like cash, the offline digital euro could continue to be used in such situations.
The draft opinion also suggested watering down the proposed obligation to accept digital euros in all retail settings. Meanwhile, as the FT reported in November, the digital euro CBDC was also facing pushback from the Euro Area’s banks, which claimed that the “current design of the retail digital euro largely addresses the same use cases as private solutions, without offering any clear added value for consumers.”
It’s also worth keeping in mind that Navarette’s predecessor as rapporteur on the digital euro, the German MEP Stefan Berger, ended up becoming one of the digital euro’s fiercest critics, eventually stepping down from the role. Among other things, Berger voiced concerns about the existential threat the CBDC could pose to small German savings banks, which are the financial backbone of Germany’s already struggling Mittelstand (small and medium sized businesses).
From Politico:
According to Berger, what banks fear most is that the digital euro could prompt customers to withdraw deposits very suddenly, sparking a destabilizing bank run on smaller lenders. “It’s no longer the money of the bank [after it is transferred],” Berger said, adding that the average deposit for a small German bank is about €3,000.
Coincidentally, €3,000 is the proposed holding limit for the digital euro. The German
Berger, like Navarrete, became convinced that central bank control over digital infrastructure should be limited, arguing instead for the introduction of a so-called wholesale model governing transactions between the central bank and the banking industry. He thought that could be a way to calm everyone’s fears.
“This was my idea, just reverse it, but the ECB … they don’t want [to], and the Commission said: ‘No, just make progress with this file,’” he said.
Berger began facing accusations from MEPs in the S&D (socialists), Renew Europe (liberals) and Greens blocs, most of whom support the introduction of the digital euro, that he was undermining the “democratic process.” Eventually, he handed in his notice.
Grand Deceptions
In sum, just a few months ago it looked like the digital euro was facing a wall of resistance, not only from private sector banks but also from the two MEPs that had been appointed to promote the project. But that wall, it seems, has now crumbled. An overwhelming majority of the EU’s rubber-stamping legislative chamber not only support the launch of a digital euro in all its forms, they want it to happen as soon as possible…
Nick Corbishley 