The European Commission has voiced support for a strategy to roll out a digital euro within the next five years.
“I think we need a digital euro,” Executive Vice President Valdis Dombrovskis was cited by Politico as saying on 20 January.
The Latvian politician, who has served as Executive Vice President of the European Commission for An Economy that Works for People since 2019 and European Commissioner for Trade since 2020, expressed confidence that eurozone central bankers were increasingly leaning towards the need for a virtual currency as a complement to ordinary banknotes and coinage.
Dombrovskis, who is an observer at European Central Bank (ECB) Governing Council meetings, continued:
“I can really say that this debate is ongoing and progress is being made in this direction.”
Race Towards a Digital Euro
The developments come as earlier in the week, the European Commission unveiled that it was working with the European Central Bank to design a new digital means of payment, with experimental work ongoing at its financial-technology lab.
The European Central Bank said in October 2020 it will decide whether to pursue or abandon plans to issue a digital euro toward mid-2021.
Unlike bitcoin, whose value is based on demand, the digital euro would be equivalent to an electronic banknote backed by the ECB, with people able to pay and exchange digital euros like they would normal currency.
The initiative has also drummed up political support, with EU finance ministers repeatedly urging the expediency of a digital euro to counter the Diem project, backed by Facebook and 26 other companies.
Diem (formerly Libra) is a permissioned blockchain-based payment system proposed by the US social media company Facebook, Inc. that presupposes a private currency implemented as a cryptocurrency.
Another driving force for the mulled rollout has been cited eagerness not to be outstripped by China and other central banks which are considering virtual versions of their money.
Digital Hazards
The digital euro might pose a threat to EU banks unless it comes hand in hand with appropriate design features and safeguards, says the Commission, as it has been collaborating with the ECB to pinpoint the potential hazards. Legislation is also being reportedly looked at that might be needed to counter these dangers.
Accordingly, people might opt to hold savings in digital euros rather than cash in accounts, which can come with fees and offer little return at current rates.
However, banks might stand to misplace a vital source of funding by losing deposits, resulting in increased lending rates and decelerating economic activity.
“The ECB and European Commission will jointly review a broad range of policy, legal and technical questions. That’s why we are announcing that we will create this working group,” said Dombrovskis.
The official stopped short of offering a definitive timeline for rolling out the digital euro, while referencing the words of ECB President Christine Lagarde, who said earlier that she “has announced that she sees at least a five-year timeline as a feasible timeline”.
Shaking Off Dollar Dominance
The announcement of the Commission and the European Central Bank’s plan to design the new means of payment followed the Commission’s unveiled strategy to erode the US dollar’s global influence by boosting the euro via trade, foreign policy and financial markets.
The revealed plan stated "a digital euro could support the digitalisation of the EU’s economy and its strategic autonomy".
Calls to boost the European currency gained steam due to fallout from Washington's reimposed sanctions on Iran (after then-President Donald Trump unilaterally scrapped the landmark JCPOA deal with Iran in May 2018) that also aimed to punish European financial institutions, companies, and individuals who continued to pursue business with the Islamic Republic.
Another motivating circumstance has been Brexit, as the UK’s exit from the European bloc generated a new reality, with the need for Brussels to update its financial infrastructure accordingly.
The issue of how to safely move money across borders has become paramount of late also due to banks curtailing correspondent services over the years.
“There we can see how digital euros can be used in international payments. Those will be some design questions which we would need to answer,” Dombrovskis said.