Dombrovskis: ‘We need a digital euro’

The European Commission is throwing its weight behind plans to introduce a digital euro within the next five years.

“I think we need a digital euro,” Executive Vice President Valdis Dombrovskis told reporters Wednesday, a day after the Commission announced it’s working with the European Central Bank to design the new means of payment.

The ECB is experimenting on a digital euro at its financial-technology lab and is due this summer to decide whether to launch the virtual currency as a complement to the cash in peoples’ wallets.

Dombrovskis, who heads trade policy and oversees economic matters at the Brussels executive body, is confident that eurozone central bankers are leaning towards a digital rollout.

Referring to his seat as an observer at ECB Governing Council meetings, Dombrovskis continued, “I can really say that this debate is ongoing and progress is being made in this direction.”

The initiative has political backing too. EU finance ministers have repeatedly called for a digital euro to counter the Diem project, backed by Facebook and 26 other companies and with plans to launch a payments service this year. Other political figures urge speedy action to match China and other central banks considering virtual versions of their money.

Digital dangers

The digital euro, however, poses a threat to EU banks if introduced without the right design features and safeguards. The Commission will work with the ECB to pinpoint those hazards and consider whether legislation is needed to counter them.

Savers, for example, could see more benefit in holding digital euros than depositing their cash in accounts, which can come with fees and offer little return at current rates.

Losing deposits would cost banks a vital source of funding and lead to increased lending rates, slowing economic activity. In a panic, savers fleeing to a digital euro could set off bank runs with the click of button.

“The ECB and European Commission will jointly review a broad range of policy, legal and technical questions,” Dombrovskis said. “That’s why we are announcing that we will create this working group.”

The Commission isn’t coming in cold to the issues around cryptocurrencies. It set up a dedicated unit to boost its regulatory expertise of fintech in the fall of 2019 and last year proposed legislation on cryptocurrencies such as Diem’s.

Dombrovskis stopped short of saying how long it would take to introduce the digital euro. But the Latvian pointed to comments made by ECB President Christine Lagarde, saying she “has announced that she sees at least a five-year timeline as a feasible timeline.”

Going global

Tuesday’s joint announcement with the ECB came within a few hours of the Commission’s latest plan to take on the U.S. dollar’s global influence by boosting the euro through trade, foreign policy and financial markets.

The strategy paper stated “a digital euro could support the digitalisation of the EU’s economy and its strategic autonomy,” especially when it comes to correspondent banking for international business.

Banks have curtailed correspondent services in recent years, raising questions of how to safely move money across borders without inviting money launderers and illicit business.

“There we can see how digital euros can be used in international payments,” Dombrovskis said. “Those will be some design questions which we would need to answer.”