Digital euro sparks ideological clash in critical parliamentary review

New paper by Bindseil/Senner suggests sovereignty at risk, also from the home team

The ‘digital euro does not appear to be the solution to any of these problems’ is a familiar refrain in central bank digital currency discussions with incumbent commercial bank and payments players, but is perhaps unexpected from the man charged with piloting digital euro legislation through the European Parliament.

The challenges range from the decline of cash use, the dominance of non-European players in payments to the anticipated rise of stablecoins. Fernando Navarette, the ‘rapporteur’ in question, is challenging the European Central Bank project head on, lobbying instead for a commercial bank-oriented answer, while regulators and the central bank would vouchsafe interoperability and set the framework for the private sector to operate in.

The Eurosystem presses on, less controversially, with wholesale CBDC in response to accelerating distributed ledger technology-based finance in the US. However, a more contentious battle still rages over the future of European retail payments. Here, complicated technical and political considerations find themselves alongside sophisticated lobbying on behalf of vested interests. Those, a new paper contends, may be harming not only Europe’s monetary sovereignty but its (quasi-)national sovereignty.

Building a case for the digital euro

The provenance of the paper is significant, authored by Ulrich Bindseil, formerly director general, market infrastructure and payment systems at the ECB and a progenitor of the digital euro project, together with Richard Senner from the Swiss National Bank. It appears to rebut claims such as that by Markus Ferber, economic spokesperson for the European People’s Party in the European Parliament, that ‘vague notions of monetary sovereignty do not cut it’ as a compelling case for the digital euro.

Bindseil and Senner open their paper with an argument between the US and Brazil about Pix, Banco Central do Brasil’s instant payments platform. US Trade Representative Jamieson Greer has complained unfairly benefits the Brazilian government system at the expense of US commercial interests. which exemplifies the increasingly brutal potential impact of resurgent mercantilism on the freedom of sovereign nations to act in their own monetary interests.

This new reality, coupled with the essentially boundless nature of technology, is changing the calculations that policy-makers should make about versions of money and payments. India, Brazil and China have concluded that the state needs to continue to treat payments as a public good in the digital realm, even if the private sector is to play an important role in it. These major jurisdictions also found a way to work with initially reluctant banks on these projects – the economic impact in India has been particularly pronounced.

Broadening definition of sovereignty

In the joint paper, Bindseil/Senner propose to define monetary sovereignty as ‘the freedom and ability of a nation’s people to effectively govern themselves such as to decide and implement the best policies in their present and future interest regarding the creation and the usage of currency, including the unit of account, means of payment, and store of value functions’. While uncontroversial, the logic quickly flows into practically contentious areas: ‘no dependency and vulnerability to hostile foreign actors, fraud prevention, consumer protection, restricting the abuse of market power’, along with the ability to collect seigniorage, and prevent the collection of information by foreign actors. At meetings with OMFIF’s Digital Monetary Institute, a wide range of conservative-leaning European market participants have referenced so-called ‘kill switches in Washington’. As of 2022, international card schemes represented 61% of payments in Europe.

Bindseil/Senner’s broader definition of sovereignty rests on a notion of the public good and the perspective of the people, who in their view should be the ultimate sovereign, rather than merely the freedom of a government to act as it wishes. The contention is that, while populists may appear to advance national interests, they may, in practice, undermine sovereignty. This happens not merely by pursuing zero-sum mercantilism, but also by by actually favouring vested interests of industry lobbies instead of those of the people. Not infrequently, populists object to public versions of digital money.

Battle of public and industry interest

Threats to European monetary sovereignty might lie much closer to home in the form of careful lobbying by European banking groups looking to protect transaction services revenues and deposits. So far, central bank money in the form of cash has been a viable alternative to private solutions, but with the current trend towards electronic payments, this may soon be over, implying that banks could benefit from liquidity inflows (when banknote holdings decline) and higher fees collected through private payment solutions to which they participate (such as interchange fees).

The exit of central bank money would not only increase the market share of the private sector, but also reduce competition in a market dominated by network effects and thereby enlarge the scope for abusive fee setting. Preserving the role of central bank money would therefore be in the interest of the people, while its exit would be in the interest of the industry.

This lobbying has already resulted in a partial neutering of the digital euro project through the adding of holding limits – anticipated to be €3000 or lower – and a guarantee that it will not be remunerated. These decisions are designed to lessen the attractiveness of the instrument in comparison to bank money.

The private sector has so far not covered itself in glory with the creation of a pan-European payments champion. One observer suggested that recent attempts to achieve an interoperability solution between EPI and EuroPA, was merely a vehicle for banks to argue that CBDC is unnecessary, and stall for time.

European public money finds itself therefore in a peculiar limbo. With widespread but rapidly declining cash use, no credible private-sector player yet to join Mastercard and Visa in payments facilitation, potential disruption from new private versions of money in the form of stablecoins, new risks from military or commercial adversaries, including former allies, and lobbyist pressure to prevent state vehicles stepping in to remedy what might be described in the short term as a market failure, Bindseil/Senner would contend that this case is far from ‘vague’.

John Orchard is Chairman of the Digital Monetary Institute at OMFIF.

Join OMFIF on 17 October to examine CBDC as a unified and integrated currency system: wholesale, retail and financial sector interoperability.

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