Why Europe’s Banks Are Pushing Back Against the ECB’s Digital Euro Plans

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The preparation phase of the European Central Bank’s (ECB) plan to digitalise the euro has successfully concluded and is on track to be implemented by 2029. The digital euro is an electronic means of payment similar to banknotes and coins, issued by the central bank and available to everyone within the eurozone. The ECB argues that digitalisation would support financial inclusion, protect privacy, and make payments more efficient. Most recently, it has faced backlash from significant European private banks such as ING and Deutsche Bank, which argue that digitalisation would undermine the private-sector payment system and financial stability. How can the digital euro be safely implemented within the EU, without creating financial instability?

Background

Traditionally, there are two forms of money: public and private. The cash in your wallet is called public money, and the sole issuer and guarantor is the ECB. This makes cash relatively risk-free. On the other hand, the deposits you may find sitting in your bank account, as well as other means of payment such as credit cards or bank loans, are forms of private money. Private money is money issued by an individual or company, and indeed, was once public money in one way or another. For example, imagine a consumer who earned their monthly paycheck in cash and decides to go to a store to purchase a chocolate bar. The consumer pays the vendor EUR 2 in cash, which the vendor stores and deposits into their bank account. Once deposited, the vendor becomes dependent on the private bank to access or withdraw those funds.

If private money already comes in digital form, such as bank deposits accessed via debit cards, then why do we need a digital euro? To date, traditional banknotes and coins are the only forms of public money within the EU. The introduction of a digital euro would also be considered a form of public money, guaranteed by the ECB and less dependent on private banks.

How will the digital euro benefit us?

The digital euro will function much like physical euros, but in an entirely digital format. Consumers will hold digital euros in an electronic wallet, similar to how people use physical cash or bank accounts today. The digital wallet can either be linked to a commercial bank or a public entity, such as a post office, thereby fostering financial and digital inclusion for those without a bank account. Payments or transfers through digital wallets will be instant, with no delays or approval times, and can also be made offline. Also, consumers will benefit from stronger financial security, given that the digital euro would be backed by the ECB. The digital euros in your wallet will always be at your disposal, and there will not be any risk of bank insolvency. Unlike private banks such as ING, the ECB would not use personal data for commercial purposes or track your payment history. Most importantly, the digital euro would not rely on some aspects of traditional private banking infrastructure. Payment network systems such as Visa or Mastercard typically facilitate transactions between a consumer’s bank and a merchant’s bank, and for this, they charge a small ‘interchange’ fee. A digital euro system would diminish this fee, creating a more attractive alternative for both consumers and businesses. Inevitably, this raises concerns for private banks.

What do private banks think of the digital euro?

If you could keep your money in a digital euro wallet backed by the ECB at no cost, why would you deposit it with a bank instead? This is precisely the reason why banks are pushing back against the ECB’s digital euro plans. Private banks argue that implementing a digital euro will incentivize consumers to transfer their deposits to digital euro accounts, which can result in financial instability. Besides a loss in profitability, the availability of credit within the EU will be hindered, making borrowing more difficult. Additionally, banks question the ECB on whether the digital euro will use existing private banking systems that prevent fraud and money laundering. 

British economist Kevin Dowd supports these claims and argues that central banks cannot compete against private payment providers because they are “not good at retail-facing activities”, and experience suggests that digital currencies “don't offer tangible benefits that alternatives can’t already deliver”. 

How does the  ECB plan to counter potential financial instability?

How credible are these arguments? It is important to note that if the digital euro indeed exacerbates deposit runs, the impact will vary by bank size. Larger banks are less likely to be affected compared to smaller ones that may heavily rely on household deposits, as customers in smaller banks tend to have lower deposit levels. Therefore, the proportion of deposits withdrawn would be higher for smaller banks, putting them at greater risk of insolvency compared to larger banks. 

Nevertheless, the ECB wants to ensure financial stability within the EU and limit any potential risks. After all, if citizens begin converting all of their deposits into digital euros for convenience or lower costs, private banks will face severe liquidity issues, which can harm the economy. An analysis by the European Commission suggests that banks may face liquidity issues and increased funding costs only if deposits were withdrawn on a large scale. In order to address this, the ECB will implement holding limits of around EUR 3000. Although this would not constrain users' ability to make large payments, it would limit individual holdings and prevent the digital euro from being used as the primary store of value. These holding limits serve to mitigate the risks of the digital euro on the economy. The ECB has also established a so-called ‘waterfall approach’ within the design of the digital euro to ensure individuals remain engaged with commercial banks. If someone receives a payment on their digital wallet that exceeds the EUR 3000 holding limit, the excess funds will be transferred to a private money account. This could be a commercial bank chosen by the digital euro user. Similarly, if someone makes a payment that exceeds the EUR 3000 limit, the excess funds will be drawn from that same private account.

Final remarks

The ECB’s final decision on whether to issue a digital euro will only be taken once legislation has been completed and approved. Legislators recently requested the ECB to provide an analysis on the potential financial stability effects of the digital euro. The study states that given the holding limits, the impact of the digital euro on banks’ deposit outflows will be manageable, and there would be no significant impact on financial stability. The question remains: how credible are the arguments from private banks?