The strategic choice of the digital euro explained by ECB adviser Alessandro Giovannini

Much has been said — often without quite getting to the heart of the matter — about what the digital euro will be. The answer is very simple: it will be a means of payment; the digital version of cash (and not its substitute). But how might it enter our daily lives? Alessandro Giovannini, a senior official at the European Central Bank and Adviser to the digital euro, explained it to Il Foglio. A brief technical preface: the euros we hold in current accounts are commercial-bank money, whereas cash — used less and less these days — is central-bank money. Giovannini starts here: “For citizens, central-bank money today exists only as cash; with the digital euro we want to preserve that certainty. The aim is to translate the benefits of cash into the digital realm: free to use, reliable, respectful of privacy, and usable accepted in the entire euro area.” The Challenges of Europe’s Payments System: Limited Competition, Non-EU Players and Higher Fees Nowadays Europe’s payments system shows an increasing dependence on private, non-European networks: two-thirds of all card payments are processed by non-EU schemes such as Visa and Mastercard. And even where national operators exist — in just seven of the twenty euro-area countries — like Bancomat in Italy, they often don’t work across borders unless supported by non-European networks. What does that mean in practice? In France or Germany, shops won’t accept your Bancomat card — only their own domestic systems. “If we can use our national cards across borders, it’s only thanks to non-European networks such as Visa and Mastercard. This limits consumer choice and reduces competition” notes Giovannini. These national systems are often not even usable for online purchases, where consumers again turn to Visa, Mastercard or PayPal. And then there’s the additional challenge posed by the arrival of Big Tech players — Apple, Google and the like — in the payments sector. Partly because European payment systems play such a marginal role, and competition is therefore weak, transaction fees remain high. “We want to offer an alternative platform on which Europe’s different payment systems can compete — also through innovation,” Giovannini stresses. One of the key benefits the ECB adviser identifies concerns merchants: “It would lower costs, especially for small retailers who have little bargaining power and currently pay, on average, transaction fees three to four times higher than large chains.” The digital euro will allow all payment systems to be used abroad — even without Visa or Mastercard. Giovannini explains that the digital euro would also serve as a standardised, Europe-wide platform, enabling different payment systems to compete far more easily. “Today, anyone innovating at national level struggles to expand. The technology behind a domestic payments system — for example, Bancomat Pay, used by individuals and retailers in Italy — isn’t compatible abroad: different technologies, contracts, terminals, and so on. It would require complex economic agreements and technical configurations”. Such processes, he stresses, prevent cutting-edge ideas from scaling beyond national borders — a key step to reaching the large volumes needed to sustain innovation. “With the digital euro, thanks to shared technical standards and a common infrastructure, Bancomat Pay — like all European systems — could be accepted by terminals across the euro area,” Giovannini explains. He also highlights Italy’s prominent role in the project: “Among the seventy innovation partners, fifteen per cent are Italian.” And these innovations are highly diverse: “If an Italian start-up develops for Trenitalia a new, efficient ticket payment and refund system, it could easily offer the same solution to Deutsche Bahn”. As for consumer services, the ECB official mentions a proposal by Poste Italiane: “A youth account, like Postepay for Erasmus students, could allow young people to combine financial functions with public-service cards at the checkout — for example, the student card — automatically applying discounts. With the digital euro, such a product could be marketed anywhere across the euro area. Strategic autonomy from non-EU systems (Visa, Mastercard, Alipay), and the lesson from the Draghi Report on scalability Strategic autonomy entails a European supply chain: “For the digital euro to underpin autonomy, it must do so at every layer. ECB procurement therefore admitted only EU-registered companies not controlled by non-EU entities”. The benefits extend to human capital: “We would develop frontier expertise on a single platform serving 400 million residents, rather than confining technicians to domestic workarounds”. This echoes the Draghi report’s lesson on fragmentation: without EU-wide scale, innovation falters, whereas Competitors operate globally — Visa, Mastercard, Apple and Google in the US; Alipay in China.  Payments initiated in digital euro and settled in another digital currency The international dimension is equally crucial. “Managing payments — including those across borders — is a core task for a central bank,” Giovannini explains. The ECB has already built TIPS, an infrastructure for instant, wholesale payments that is already used beyond the euro area. “We’re offering a European model that respects privacy and regulation — one that others can connect to because it’s multi-currency. Sweden and Denmark are already using it, and Norway will join in 2028”. The digital euro, he continues, builds on these experiences and is designed to be multi-currency by nature: “There will be an ‘extra column’ in the ledger, allowing transactions to be recorded in euros, Swedish krona, sterling, and so on”. It would be an open infrastructure, capable of linking payments that are initiated in digital euro and settled in another digital currency. For example, an Italian tourist in India could pay in digital euro, while the merchant receives digital rupees. “To make such interoperability possible,” Giovannini adds, “we are already in contact with the Bank of England, the Bank of Japan, the Bank of Israel and other central banks. We’re sharing standards and ensuring transparency from the start, so that once their digital currencies are developed, connecting them will be far easier”. Digital euro abroad too? The decisions will be for the European co-legislators. The decisions, however, will be political. The European Parliament and the Council of the European Union are currently considering whether to allow foreign merchants interoperability – that is, the ability to accept payments in digital euro while receiving the corresponding amount in their local currency – and how to enable foreign citizens to hold digital euro. The guiding principle is the one set by the G7 in 2021: no digital currency should undermine another jurisdiction. “An indiscriminate global adoption of the digital euro would cause eurisation and instability. As far as interoperability is concerned, the risk of substitution does not arise, because merchants will not be allowed to hold digital euro,” Giovannini notes. He then outlines three hypothetical cases in which the digital euro could be used by citizens of countries outside the euro area: “The first concerns non-EU microstates, such as San Marino, for which only a minor amendment to the existing agreements on the use of the euro would be required. The second case involves EU countries outside the euro area, such as Sweden: this would require a bilateral arrangement between the relevant authorities. The third concerns non-EU countries, where a bilateral agreement would not be sufficient. An international treaty would be necessary – for example, between the Government of the United Kingdom, the Bank of England and the European Union”. No banking disintermediation: holding limits and the “waterfall” effect To those who fear an upheaval of the financial architecture, Giovannini is unequivocal: “The digital euro is a means of payment, not a monetary policy tool. It does not aim to turn the central bank into a retail account manager”. He adds: “It would in fact reinforce the two-tier model — central-bank money and commercial-bank money. The distribution of the digital euro will take place through banks and payment service providers, which will continue to manage accounts, credit, and customer relationships”. The digital euro will also include mechanisms and rules designed to prevent deposit outflows and safeguard financial stability. One example is the holding limit, which the ECB has yet to define (the Bank of England has suggested a range between ten and twenty thousand pounds). How would it work if this limit were set at 3,000 euros per person, as some have proposed? And what happens once the 3,000-euro balance is reached? Here comes the “waterfall” effect: the digital euro account could be linked to a personal bank account so that, when a transaction is made, the required funds would automatically flow to or from that account. A digital euro would not entail an expansion of the ECB’s balance sheet And would it be easier for governments to finance public debt through the ECB’s balance sheet? Giovannini replies: “Absolutely not. The creation of a digital euro would not imply any expansion of the ECB’s balance sheet, as it would primarily represent a transformation of existing liabilities. Banks would use their reserves to meet customers’ requests to obtain digital euro, just as they currently meet demand for banknotes”. Stablecoins and the digital euro: two alternatives not in competition Finally, Giovannini addresses the point raised by the Minister of Economy, Giancarlo Giorgetti, who described the digital euro as “the answer to stablecoins,” considering them more dangerous than tariffs: “Estimates suggest that by 2028 the global market for dollar-denominated stablecoins could reach the size of Italy’s GDP" - says Giovannini - "If tomorrow people were able to make payments with stablecoins, few would stop to consider that they are using dollars — they would simply choose the most convenient option. In any case, with the digital euro we do not aim to impose anything, but rather to offer a safe alternative, so that citizens do not have to rely on non-European solutions simply because there is no other choice” Giovannini explains. An opportunity for the European Union If the EU fails to heed Draghi’s call and does not push for innovation and economies of scale, the cost for citizens and businesses will continue to rise — as is already the case with transaction fees. Greater competition is needed, yet at the same time Europe cannot afford to hand over sovereignty of its citizens’ financial services to Trump, Xi & Co. Otherwise, we will have learned nothing from the lesson of tariffs. These are not Alessandro Giovannini’s words — but they ought to be Europe’s.

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