Why is the banking lobby afraid of a digital euro?

This op-ed, authored by Dr Martijn van der Linden and Vicky Van Eyck was originally published in EU Observer, on 1 March 2024.

Over the next few weeks, the European Parliament will negotiate and vote on legislation for the digital euro. This new form of money could transform the way Europeans handle payments, savings and investments.

An attractive digital euro is a universally accessible form of public (central bank) money that combines the privacy and safety of cash with the convenience of digital transactions. Its purpose is to update cash to the digital age. To achieve widespread accessibility and innovation, access to the digital euro must be possible through a wide range of private and public intermediaries, and use should be free for all consumers.

However, the path to such an attractive digital euro faces significant resistance from the banking sector, which sees this new form of money as a direct threat to its central position in the monetary and financial system.

The European Parliament’s forthcoming deliberations are decisive. The outcome will either pave the way for a competitive digital euro by 2026 or stifle its potential.

Two-year lobbying campaign

Over the past two years, banks and their interest groups have conducted an extensive and highly effective lobbying campaign aimed at minimising the impact of the digital euro on their business model. Their strategy includes securing exclusive meetings with key policymakers, writing letters to the ECB, pushing for a digital euro that uses the existing banking infrastructure, and advocating strict usage limits that effectively undermine the digital euro’s potential.

For example, to prevent the digital euro from becoming a useful store of value and means of payment for larger amounts, the banking lobby proposes to cap digital euro holdings and exclude interest payments.

Such restrictions undermine the digital euro’s potential to provide a real alternative to bank deposits and bank services and protect the privileged position of the banking sector at the expense of a level playing field and wider financial inclusion.

Contrary to the banking sector’s narrative, restricting the functionality of the digital euro could be detrimental to the European economy. It risks stifling competition, hampering innovation and reinforcing an architecture that prioritises the interests of banks over the general public and non-bank payment service providers.

Bankers often claim that an attractive digital euro is a threat to financial stability. This claim is unsupported by empirical evidence and ignores the ability of non-bank financial intermediaries to fill any gaps in the market. The digital euro would likely lead to more diversity and a more market-based financial landscape in Europe.

However, to give banks time to adapt, it makes sense to introduce the digital euro initially with restrictions. These restrictions should then be gradually relaxed to increase the usability of the digital euro and foster greater competition.

As Europe deals with the introduction of the digital euro, the decision-making process must be transparent, inclusive and based on the public interest. To date, the development process has been disproportionately influenced by the banking lobby and, as a result, the digital euro’s potential to promote a more efficient, equitable and innovative monetary and financial ecosystem is at risk.

The way forward is a careful reassessment of the intended role(s) of the digital euro. Lawmakers should resist the anticompetitive proposals of the banking sector and embrace a vision of the digital euro that serves the collective interests of Europeans.

This means that the digital euro must be attractive, accessible and beneficial to all. The deliberation process must be free from the disproportionate influence of an industry that has much to lose from a level playing field for payment services and financial intermediation.

In conclusion, the debate on the digital euro is not so much a technocratic and legislative affair as a defining political moment in the history of Europe’s money and payments system. It is an opportunity to redefine the future of money, payments and financial intermediation in a way that is in line with the principles of inclusiveness, fair markets and innovation.

Europeans deserve a digital euro that transcends the narrow interests of the banking lobby and embodies the promise of a fairer and more competitive monetary and financial landscape.