Does the digital euro make payments unnecessarily complex?

Published on: 10 August 2023

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.”

The proportion of cash has been declining for years, that increases dependence on the banking system

More innovative

It brings Kalshoven to the point that the digital euro, issued by central banks, makes the European payments system more robust. “Cash is decreasing, scriptural money is increasing. And big tech isn’t letting up either. Facebook, for example, came up with its own currency a few years ago, the Libra, later called Diem. But Facebook is also from the US. On top of that, you have to ask yourself the question of whether you want to run the payment system partly through a tech company.” According to Kalshoven, these are all reasons to opt for a Central Bank Digital Currency, CBDC for short. In this regard, Kalshoven also cites the recent Covid pandemic. “In the Netherlands, we mainly provided support to companies, in the U.S. it was different. There, residents received support, via checks. It took several weeks before people had that money. With a digital euro, or in this case a digital dollar, that could have been done much faster. An advantage of the digital euro is also that there is equal access throughout the euro zone. That works for a single currency and also immediately creates a great platform for new innovative services to be developed.”

Hooks and eyes

Still, there are hooks and eyes to the introduction of a digital euro, Kalshoven acknowledges. “You have to be careful in the event of a credit crisis, for example, that not everyone transfers the money from the private bank to the central bank. If such a bank run occurred, those private banks would fall over in no time.” That is why frameworks are being set, Kalshoven knows. “For example, there will be a maximum on how many digital euros you can have in addition to your bank account. Where that maximum lies is still unknown, but it seems unlikely that it would be more than a few thousand euros.” The subsequent form in which the digital euro might be introduced is still unclear. “You could think of an app developed by the Eurosystem for digital euros. The advantage of that is that you don’t have to deal with a failure at your own bank or in the payment system. After all, it should also be possible to use the digital euro in stores - offline - if there is no working Internet connection. Good to have an alternative in your pocket for those occasions.”

Separate app

Kalshoven believes the digital euro will not make payment transactions unnecessarily complex. “There will be a separate app, or you can choose an extra account with digital euros, which you deposit at your own bank and see as an account in the banking app. That is easy to arrange and not necessarily complicated, while on the other hand the advantages are great.” He is also referring to the fact that the digital euro will become widely available, i.e. also to people who usually do not qualify for a bank account, such as the homeless. “With that, the digital euro also contributes to financial inclusion.” And there are multiple means of payment to fall back on, in times of crisis. “Is a digital euro essential to have? Not in ordinary times, but when the need arises you will be glad to have it. Think of the digital euro as fire insurance; it’s just sensible to have.”