The European Central Bank is developing a digital currency to insulate the area from tensions with China and the United States.
In October 2021, the central bank began exploring the potential of a digital euro. This autumn, EU leaders will have to decide if the ECB should proceed with the following steps, which include testing the technical arrangements required for Europeans to start spending digital euros.
The European Central Bank's (ECB) headquarters are lighted with a massive euro symbol at the commencement of the "Luminale, light and building" event in Frankfurt, Germany, on March 12, 2016. Credit: Kai Pfaffenbach
“The ECB is worried that the eurozone will end up in a geopolitical and economic sandwich position between the big tech companies of the USA and the payment systems of China without a digital euro. Right now, Europe lacks digital platforms,” stated Guido Zimmermann, senior economist at German bank LBBW.
ECB President Christine Lagarde highlighted this notion in a November address. “The entry of big techs into payments could increase the risk of market domination and dependence on foreign payment technologies, with consequences for Europe’s strategic autonomy,” she said.
“Already now, more than two-thirds of European card payment transactions are run by companies with headquarters outside the European Union,” she added.
The leading worldwide payment firms include Mastercard, Visa, PayPal, Alipay, and UnionPay. They are all non-European. The first three are from the United States, and the latter two are from China.
"It is a fixation for some, of ensuring the sovereignty or power of the EU." – Daniel Gros; Centre for European Policy Studies
According to Zimmermann, European politicians do not want the region's consumers or businesses to become reliant on U.S. Big Tech corporations for payments. He went on to say that European authorities are also trying to prevent a situation in which China becomes the sole decider of payments on the "Digital Silk Road," a significant Chinese ambition to invest in global digitalization.
A Quest for Sovereignty
European leaders have been debating the need to be more autonomous and less dependent on other parts of the world for several years, but discussions intensified during the Covid-19 pandemic and then again following Russia's invasion of Ukraine.
“The relevance of preserving geopolitical sovereignty has increased in recent ECB speeches and publications for a digital euro. This certainly has to do with the outbreak of the Ukraine war and the increasing global geopolitical tensions,” Zimmerman said.
In November, Lagarde indicated that a digital euro "is a shared European endeavour" that "would mainly serve broader public policy objectives, such as enhancing Europe's strategic autonomy." Raw earth and magnet value chains, which are viewed as necessary in the transition to a carbon-neutral society, have recently come up in conversations regarding Europe's autonomy. These have also included energy supplies, medicinal devices, and electric vehicles.
“The concept [strategic autonomy] has its roots in the EU’s defence and security sector. However, it has become increasingly prominent in recent years as a result of the changing geopolitical context characterized by the increasing competition between the U.S. and China,” said Antonio Barroso, managing director at Teneo,
According to Zsolt Darvas, senior fellow at the Brussels-based think tank Bruegel, the ECB's action in this field is motivated in part by "growing demand for crypto assets" and the fact that many other central banks are exploring the formation of a digital currency.
“The ECB might not wish to be a laggard in terms of adopting new technologies,” he said.