As the dust settles on the European Commission’s Single Currency Package, there are questions as to how easily the key payments legislation will pass and how the industry will react.
On June 28, the European Commission published its long-awaited regulatory proposal for the digital euro as part of the Single Currency Package.
The regulation intends to establish the legal framework for a central bank digital currency, should, or rather when, the European Central Bank (ECB) opts to issue one.
Since 2020, when the ECB began to consult on issuing a digital euro, it has been as one payments expert told VIXIO recently “an interesting animal”.
It first appeared to be a way, alongside the EU’s flagship Markets in Crypto Assets regulation, of taming bigtechs that may be considering issuing their own currency.
Europe’s governments, central bankers and regulators alike were hardly subtle in their concerns that this would greatly undermine the EU’s financial system.
Those concerns have tamed slightly now, but the hope that the digital euro could aide the EU’s sovereignty and autonomy remains.
“Sovereignty is a very important driver of the digital euro project,” said Pierluigi Cuccuru, senior associate at De Matteis Law. “The digital euro started as a reaction to private stablecoins and as a way to foster European autonomy in payments. It is a big project with potentially far-reaching effects on the whole payments ecosystem.”
For instance, Cuccuru said that it could affect instant payments, which is another European priority. “As consumers would have free access to basic digital euro payments, this may put pressure on payment service providers to lower the cost of instant payments to zero to keep these attractive.”
"The Digital Euro could have a significant impact on the European market, the competitive landscape, and just generally, how we pay,” said a spokesperson for Payments Europe. “In order for that to happen, we fundamentally believe that, similar to any other payment instrument, there needs to be a use case and clear benefits to consumers and merchants.”
The spokesperson pointed out that, currently, end users have more choice in payment instruments than ever before.
“This will only increase with developments such as instant payments and open banking,” the spokesperson said.
“Adding a Digital Euro to the mix will further diversify the market, but it needs to be certain that it provides end users benefits and other instruments can compete for market share based on a regulatory level playing field.
A work in progress
“The digital euro is very much still a work in progress,” said Cuccuru. “We are approaching the end of the investigation phase, and a decision to proceed to the realisation phase will follow.”
For Cuccuru, the European Commission's proposal is important to foster the debate on the project before the ECB takes this decision. “The proposal officially involves the Council and the Parliament in the digital euro project and therefore will stimulate a wider dialogue.
“This is especially important considering that the ECB has been sometimes criticised for doing too much of the work on its own,” he said. “This is a way to democratise, and encourage more debate on the digital euro. The ongoing public consultation on the EC proposal is also a step in this direction.”
However, Victor Warhem of Centres for European Policy Networks said that there could be problems on the horizon for the smooth passing of the digital euro legislation.
For example, some of the EU’s key member states have been veering away from the centre ground, which could affect support for the digital euro both in the European Parliament and nationally.
In Italy, for example, the government has been keen to implement policies catering to physical cash use as opposed to digital payments.
"With the elections, there will be a more right-wing parliament, and more far-right MEPs who are likely to rally against this proposal, but it is the Council, not the Parliament that should be feared,” said Warhem.
“I'm sure there are many member states that are against the digital euro,” speculated Warhem. “What is happening right now is that there are major banks in every country knocking on the door of their government asking them to put a stop to this. To me, this is the likely biggest challenge."
Warhem also suggested that in Germany and other central European countries, there is an opposition to the digital euro over the fear that the state will take personal data.
“There is the possibility that this concern will grow in the coming years,” he said. “This could totally kill the project. Consumers could think that it is useless, and an overreach of the state.
“This would mean that there is little chance of it being adopted. I'm unsure if the commission and ECB are aware of these issues."
What are the member states saying?
Throughout the digital euro debate, there has been plenty of diplomacy from stakeholders, including political representatives and bewildered banking groups.
One of the more outspoken lobby groups has been Finance Denmark.
“Overall, it is not clear to Finans Danmark that there is currently any need to establish a central bank-issued digital euro,” the trade association said.
“This also takes into account the large investments that will have to be made by banks and the rest of the business community when establishing a digital euro.”
The German Banking Industry Committee, meanwhile, has said it all comes down to the design, with the association believing that a digital euro can offer added value for the economy and society if it is designed correctly.
“However, if designed incorrectly, a digital euro is associated with major risks that affect financial market stability, for example,” the association said. “Therefore, the development of a digital euro must be carefully considered and legitimised within the framework of the political process.”
Officials at Deutsche Bundesbank have been very supportive of a digital euro. Burkhard Balz, an executive board member, said recently that “it is right and important to deal with the topic now”.
For Balz, in addition to digitisation, political considerations could make a digital euro necessary.
“It is about independence and sovereignty, because payments in other European countries or online across national borders are usually only possible with the help of international card systems or internet platforms,” he said.
Balz also noted successful national products, such as the girocard, the app-based payment solution Bizum in Spain, or iDEAL, which is the market leader in the Netherlands for online payments that was recently acquired by the European Payments Initiative.
“However, there is no Europe-wide digital solution based on European infrastructure,” he pointed out. “This creates dependencies in an area that, for me, is clearly part of the critical infrastructure.”
Balz's comments link with what BBVA feels that Spain could bring to the table.
In a blog post, the retail banking giant said “as the ECB prepares for the implementation phase and EU legislators begin negotiating the legal framework for the digital euro, key decisions will be made on the synergies between the digital euro and instant payments and on the potential role of existing domestic solutions”, like Bizum.
“The Spanish solution is one of the most successful across Europe and could play a major role in the rollout of the digital euro and the expansion of instant payments at the European level,” the bank argued.
“So, in this new digital race that Europe does not want to lose, Spain has something distinctive to contribute and, therefore, the opportunity to be a key player.”
There are inevitably hurdles for the EU to jump through to get the digital euro over the finishing line that is unlikely to exist when passing other key legislation for payments, such as the instant payments proposal, which is tipped to be completed by the end of this year, and the package of payments legislation.
However, there is a feeling that, at least for now, lobbyists are not going to fight the digital euro. In fact, it appears that some even appreciate the geopolitical goals, such as with banks in Spain and in Germany.
“We need more Europe here,” Balz said, arguing that with a digital euro the EU could create a payment solution with public money for the entire euro area, with its rules and infrastructure “made in Europe”.