The European Central Bank’s proposed digital euro has moved a step closer to becoming reality after the European Parliament’s Economic and Monetary Affairs Committee backed the project, marking fresh momentum for the bloc’s plans to introduce a central bank digital currency.
‘Europe understood the lesson over the last 18 months’, Joachim Nagel, president of the Deutsche Bundesbank and member of the ECB’s governing council, told OMFIF in a wide-ranging discussion on the digital euro. On OMFIF’s ‘Invested’ podcast, he explored the broader imperatives of the European strategic autonomy initiative to reduce dependence on technological, financial and defence service providers outside the European Union.
Streams of work on the Savings and Investment Union, as well as initiatives such as those in his home country on pensions, if successful, might also bring a ‘stronger international role of the euro as a positive side effect’. He paints an optimistic portrait of its prospects and defends its rationale on multiple fronts.
Solving for fragmentation
With the legal framework expected ‘by the end of the year’ and with trial ‘transactions already at the end of 2027,’ Nagel expects a rollout in 2029. He unapologetically defends the payments sovereignty aspect of the project, drawing attention to the fact that ‘Visa and MasterCard process around two-thirds of euro area card transactions’. Where the notion that the digital euro is needed to resolve a ‘market failure’ has been a regular feature of ECB discussions, he adds that the CBDC would help ‘solve fragmentation in European payments’.
Allaying the misgivings of commercial banks, which have lobbied against it, Nagel describes them as ‘[central banks’] most important customer’. They will be consulted on and involved in the testing, and would, he expects, go on to welcome the ‘alternatives to reach out to their customers’. In other jurisdictions which have introduced state-backed electronic payment systems, such as Kenya’s M-Pesa, India’s Unified Payments Interface and Brazil’s PIX, this has been the case.
‘A very powerful solution’
Nagel is upbeat about the prospects for adoption, an issue which has hampered CBDC projects elsewhere, and some economists in OMFIF roundtables have suggested is both a practical and reputational risk to the ECB. ‘People in Europe will understand that this is a very powerful solution’. Prevalent scepticism about the euro in Germany at its inception a quarter of a century ago has been replaced with 80% support, he points out. The digital euro, whose detailed design is still a work in progress, would have ‘advantages for merchants’, who might be attracted by the potential lower transaction fees.
Nagel offered a cautious rather than dismissive note on the stablecoin insurgency, which European policy-makers are working either to contain with regulation or render somewhat surplus to the ‘really intense’ work ‘of the utmost importance’ in the Pontes and Appia projects – initiatives to digitalise the existing two-tier financial system organised around the central bank. Nagel, noting a ‘plateau in outstanding volumes’, describes stablecoins as ‘an asset class rather than competition with central bank money’. Here, the Eurosystem institutions ‘are frontrunners’.
The digital euro stands to play ‘an important role’ also in underpinning the relative global status and the success of the currency itself, at a time when there has been ‘some loss of confidence in the dollar and in US institutions’.
Resolving opacity
Nevertheless, Europe still has plenty of ‘homework’ to create a much more integrated and self-sufficient financial capital market, with an urgent need to reduce the ‘opacity’ coming from a patchwork of multi-country regulation. Savings and Investment Union initiatives are now underway and designed to address this, ‘altering the landscape of the European financial system’.
With a clear nod to the ‘sound money’ principles that Germany insisted upon to fold the Deutsche Mark into the euro, Nagel stresses that the solidity and attractiveness of the single currency would also require continued vigilance on ‘stability-oriented monetary and fiscal policies’.
Resilience in face of ‘future challenges’
Looking ahead to likely challenges that the ECB, an institution which some observers have speculated Nagel is a candidate to lead, the Bundesbanker sees geopolitical tensions ahead for ‘quite some time’, together with ‘work still to do on inflation, potentially, as well as getting to grips with the ‘strong effects’ on the economy of artificial intelligence. Treading the tightrope between a hawkish domestic audience and unorthodox crisis policy at a European level and using AI to calibrate his hawk-dove balance, Nagel regards the institution as fit for the challenge.  ‘Team player’ ECB President Christine Lagarde had also helped foster a collegiate identity, he says. ‘On the governing council, we are discussing and deciding as Europeans’.
Nagel, who earlier in his career successfully oversaw the SoFFin agency to steady the German banking sector after the 2008 global financial crisis, learnt how quickly crisis-stricken markets can move ahead of policy-makers. He now believes the ECB has shown a ‘capability to adapt to situations’ with new instruments, such as quantitative easing programmes and the unused Transmission Protection Instrument. Nagel differs notably in this regard from his predecessors, who rejected QE, which was also challenged by the German constitutional court. While reiterating an institutional commitment to price stability, ‘I promise you we will show this same capability for future challenges’, Nagel says.
‘Europe is forged in crisis’, the ‘Father of Europe’ Jean Monnet famously observed. It could be that European policy-makers trying to build strategic autonomy at speed eventually come to thank the one brought about by a transatlantic change of heart.
John Orchard is Chairman of the Digital Monetary Institute at OMFIF.
Listen to the full conversation on Invested, the OMFIF podcast: Preparations for the digital euro with Deutsche Bundesbank’s Joachim Nagel.
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