Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time macroeconomist and expert strategist Charles Kalshoven at APG on the question of whether the arrival of the digital euro will make payments unnecessarily complex. “Think of it as fire insurance; it’s just sensible to have it.”
The European Commission presented a proposal for the possible issuance of a digital euro on June 28, 2023. The commission proposes that the digital euro would have legal tender status, be non-programmable and that the privacy of EU citizens would be guarded in the same way as current bank payments. People can decide for themselves whether or not they want to have and use digital euros to make payments. In addition, cash will remain available as usual. With the establishment of these frameworks, the arrival of the digital euro seems close at hand. But the question arises; won't the digital euro make payments unnecessarily complex?
Money enables division of labor
“Money has three functions”, Kalshoven explains, “it is a unit of account, a means of hoarding and a means of exchange. In short, money enables the division of labor, and that is the basis of our prosperity.” On top of that, everyone has confidence in the current payment system. “It’s just pieces of paper or numbers on a screen, but you can buy bread with it, day in and day out. So, every day, as a consumer, you get that confirmation, which instills confidence. And that’s essential. For example, coins today are no longer linked to gold or silver. A dollar says ‘in God we trust’' but actually it is ‘in trust we trust.’ This is a circular argument, of course, but a very valuable one. Because we all trust money, we can cooperate with millions of unknown others. Just think how many people are involved in just that sandwich you eat in the morning.” So, according to Kalshoven, we derive trust not from gold, but from everyday practice and from the central bank that guards the value of the currency. “Precisely because our confidence in the value of our money is so high, we get angry when we are surprised by high inflation.”
Public and private
Kalshoven also touches on the distinction between public and private money. “Public money is publicly issued by the central bank, in the form of coins and banknotes. In contrast, private money is created when commercial banks provide loans. Basically, we are talking about cash and scriptural money, and in practice, of course, they are completely exchangeable. However, the proportion of cash has been declining for years. That increases dependence on the banking system. Then again, the payment system is dominated by two big American companies, Maestro and Visa/V PAY. Not every dependency is immediately problematic, but you want some sovereignty as Europe. And we have learned a thing or two about robustness in recent years.”