First it becomes soft, then digital – does it have to be? The European Central Bank is gradually implementing its plan to turn the euro into a digital currency. At a time when inflation is rampant, the ECB is finding it difficult to push through with this plan.

Money is a matter of trust – a truism, but since a currency no longer has to be backed by corresponding gold reserves, trust in the central bank is the only basis of the value of paper and coin money. In 1971, the USA gave up its promise to keep the equivalent value in gold for every dollar spent, making the world’s leading currency pure trust capital. The euro as a common currency was never guaranteed by a real gold hoard: the only thing that counted and still counts is the promise of the European Central Bank (ECB) to guarantee the value of the euro. And this promise has been shattered: the ECB has not prevented inflation from skyrocketing. In the face of inflation of ten percent and more, confidence in them has been shaken.

Now, of all times, a new change is imminent: The ECB has been testing procedures for creating a “digital euro” for a good year and will continue until October 2023. After the first phase, around three years of practical tests should be necessary before a virtual euro can actually appear alongside cash and bank balances.

What’s it all about? Up to now, Germans in particular still like to pay in cash at the till in Europe, but this way of paying bills is declining year by year. Credit cards, debit cards (such as the Maestro card, formerly ec card) and increasingly virtual payment methods such as Google Pay or Apple Pay are gaining ground.

All of these digital payment methods, to which PayPal and other service providers also contribute, have one thing in common: the operators of the platforms are usually not from Europe. “Two-thirds of card payments in Europe are made by providers who have their headquarters outside the European Union,” said ECB boss Christine Lagarde on November 8 at a conference in Brussels on the future of digital money. The “autonomy of Europe” also requires its own presence in the increasingly digital, virtual world of money.

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One does not want to abolish cash, according to Lagarde, to widespread fears that with the introduction of a euro that is available on smartphones and only in virtual purses (“wallets”), the valued privacy and confidentiality of paying with coins and notes will gradually after disappear. Such fears were voiced when production of the 500 euro note was discontinued in 2019. The somewhat flippant reaction from politicians didn’t exactly help, after all only drug dealers and criminals used the high bills. In Germany in particular, data protection enjoys a high value, even among ordinary people, even if the users of numerous Internet platforms and digital services usually distribute their data quite liberally in everyday life. So far, however, the generosity has stopped when it comes to (cash) money.

Federal Minister of Finance Christian Lindner also spoke about this recently: At a conference on the digital euro and the private sphere of citizens, Lindner said that the central bank was primarily researching as part of the project how to “decouple the use of virtual money from the personal data of users “, so that the payment is registered, but not the originator at the same time. At least up to a certain amount. Of course, precautions will also have to be taken with the digital euro to identify criminal transactions as far as possible – at least in this respect virtual payment transactions should not differ from traditional transfers of larger amounts.

Significant hurdles still need to be cleared before digital central bank money is expected to be introduced in 2026 at the earliest. Especially these days, headlines about the imbalance in cryptocurrencies are dominating the public discussion. It turns out that the roughly 5,000 existing anonymous, internet-based currencies encrypted by blockchain – the best known: Bitcoin and Ether – are by no means immune to a “bank run”. The problems of a trading platform immediately affect the prices, which are already characterized by violent fluctuations, not to mention criminal fraud. They are therefore unsuitable as a means of payment for everyday transactions – but as a speculative investment they are, with a high risk of course.

A deterrent example of a country that has introduced bitcoin as legal tender is today El Salvador: The bitterly poor Central American country is suffering badly from the recent fall in the cryptocurrency price and has lost millions of dollars as a result – citizens and companies exchange bitcoins as soon as possible after receiving them anyway U.S. dollar.

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Ms. Lagarde concludes that payment systems should therefore enjoy the trust of the public as the most important asset, which “cannot simply be left to the market”. This already outlines the ECB’s most important task in the project: It will have to be made clear “that a euro is a euro”, no matter in which form, according to Lagarde. Consumers like to hear things like that, but another task will certainly be to increase awareness of the project in the coming years and to convince private individuals and companies that the digital euro is easy to use, safe and, above all, valuable .

The latter also touches on the question of how inflation will be dealt with in the future. If the common currency remains exposed to high currency devaluation in the longer term, possibly in double figures recently, a new type of medium for the euro is likely to start with a hefty mortgage. After all, it would soon be possible to see what equivalent value one receives for it, especially with international online purchases. Even more directly and clearly than when shopping in the supermarket. The stability of the euro will be more convincing in the years to come than all the arguments in favor of digitization and convenience.

“A digital euro can only be successful if it offers citizens advantages and is superior to previous digital payment methods in certain dimensions,” says economist Jonas Gross, chairman of the think tank “Digital Euro Association”. From his point of view, one of the basic requirements is that digital payments of smaller amounts, which are usually still made with cash, must be carried out absolutely anonymously.

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A possibly banal advantage of the virtual euro will probably be that theft could be virtually ruled out. Not only through measures against hackers – even the simple robbery of handbags would be rather pointless. In addition, with the credit stored on the smartphone, fellow citizens who do not have a bank account can also participate in payment transactions. Abroad, it’s not at all uncommon to see street musicians setting up a card reader in front of them instead of a hat to donate money. And even the smallest amounts are digitally preferred by shops and taxi drivers.

Cash, on the other hand, requires a great deal of attention and caution, not to mention the effort involved in transporting and storing it, as the banks commissioned to supply cash emphasize. Another thing that would be important for consumers: the elimination of all possible fees and charges for the digital euro.

In general – the banks. When planning, the ECB and the national central banks such as the Bundesbank always emphasize that the financial institutions must remain involved. That would not be absolutely necessary, because digital euros can certainly be transferred from private to private, for example when paying salaries.

Nevertheless, the financial institutions should not be bypassed; the digital euro is not intended for savings, initially the wallet balance should be limited to around 3000 euros. And the bank or savings bank will continue to be a key pillar of the money supply, said Bundesbank board member Burkhard Balz in a lecture: “The digital euro can only be a success if everyone works together – the Eurosystem, the providers of payment services, the economy and the … Consumer”.

Incidentally, this should also make sense when it comes to innovations in the world of payment transactions. The development of sometimes surprisingly useful features in the recent past often goes back to small, innovative start-ups in the financial sector. This innovative power from non-governmental sources should definitely be preserved. This insight already seems undisputed in the scenarios of the future euro world.

The article “Lagarde must guarantee a stable digital euro” comes from WirtschaftsKurier.