Nowadays, anyone who pulls out their card or smartphone to pay at the supermarket checkout in Germany has no choice. They have to pay for the goods with commercial bank money, also known as fiat money. Unlike cash, it is not issued by the European Central Bank (ECB). There is no digital central bank money in the eurozone. The ECB urgently wants to change this.

In July 2021, it started the digital euro project. After a two-year investigation phase, the European Central Bank launched the preparatory phase for digital central bank money in November 2023. There are still many question marks over the exact design. In addition, the legal framework for the introduction is still missing. However, there is much to suggest that the digital euro will come. 2028 or 2029 is currently considered a realistic date for the launch of the digital central bank money.

The digital euro is a key strategic project for the ECB and the eurozone's national central banks. „There is currently no digital payment method that is free of charge, very protective of privacy and accepted everywhere,“ said Alexandre Stervinou at the Digital Euro Conference at the end of February. He is director of Cash and Retail Payments Policy and Oversight at the French central bank. The digital euro should combine all of this – and more.

„In addition, a digital euro would strengthen the strategic autonomy and monetary sovereignty of the euro area by increasing the overall efficiency of the European payments system, promoting innovation, and increasing the system's resilience to cyber-attacks or technical disruptions, such as power outages,“ writes the ECB on its website on the question of why Europe needs digital central bank money.

However, the digital euro project is not without controversy. „I don't think there will be much demand among the population,“ says Commerzbank chief economist Jörg Krämer. He is not alone in this assessment. However, supporters and critics of the digital euro agree: the success of the project will depend on whether the population wants to pay with it or not.

After all, consumers will not be forced to use it. The digital central bank money is intended to be an additional offer to cash and the existing digital payment methods of private payment service providers. „Consumers must be able to see the added value of the digital euro,“ says Jonas Groß, co-founder and chairman of the Digital Euro Association (DEA).

He sees one of the advantages of the digital euro in the fact that it could protect users' privacy better than existing digital payment methods. „The digital euro could be designed in such a way that anonymity is completely guaranteed for low transfer amounts,“ says Groß. „Above a certain threshold, a know-your-customer process could then take effect, as is the case when paying with large sums of cash.“

In order to strengthen trust in the protection of privacy in the digital euro, he recommends making the code available to the general public as open source. A survey of 8,114 people in Europe by management consultancy Bearing Point shows that the ECB still has some catching up to do in terms of public trust. Only 16% stated that they would entrust the ECB with their digital euro transaction data. At 34%, the house bank achieved a significantly higher figure. However, the ECB is ahead of payment service providers (8%) and technology companies (4%) in terms of trust.

Alexander Schroff, Industry Lead Financial Services DACH at consulting firm Publicis Sapient, identifies several advantages of the digital euro over existing digital payment methods. „Unlike debit or credit cards, the digital euro would be a legal means of payment,“ he says. „In addition, payments would be made in real time. Value dates of up to two days, which sometimes occur with existing digital payment methods, mean a temporary loss of purchasing power.“

However, even if the digital euro becomes a legal tender, not every company in the eurozone will have to accept it. For example, exceptions are planned for companies that generally do not accept digital means of payment or are relatively small (maximum of nine employees or total assets/turnover of less than 2 million euros).

One concern among the population, particularly in Germany, is that the introduction of the digital euro could lead to the abolition of cash. The ECB and the national central banks repeatedly emphasize that this is not planned. Cash will definitely remain legal tender. However, experts agree that the digital euro could weaken the position of cash. „Of course, the introduction of the digital euro is a first step towards a cashless economy,“ says Schroff. „Not because the ECB wants to abolish cash. But if the use of the digital euro causes demand for cash to fall sharply, at some point the question will arise as to whether it is still justifiable to maintain the infrastructure for cash.“

DEA Chairman Groß can also imagine that the demand for cash will fall sharply in the coming decades – even without the introduction of a digital euro. „Especially if we eventually get to the point where cash disappears due to a lack of demand, we need a digital payment method that protects privacy.“ He is therefore in favour of the digital euro if it guarantees a high level of privacy and the code is made available as open source.

Peter Bofinger, Professor of Economics at the University of Würzburg and former economic expert, is not convinced by the digital euro. „The ECB has made a mistake,“ he says. There is no demand from consumers, and the argument of strategic autonomy doesn't work either. „The ECB is right that we need a European payment platform to strengthen our autonomy,“ says Bofinger. „But it would make much more sense for the ECB to help drive forward the European Payments Initiative (EPI) instead of setting up a parallel system with the digital euro.“

EPI is a project launched in 2020 by banks and payment service providers from Europe with the aim of launching a European payment system. This is intended to compete with the systems established in Europe from the USA and increasingly also from China. The project has stalled in the past and some banks have backed out. According to the plan, mobile-to-mobile transactions should be possible by the end of June this year. EPI online payments should then also be possible from 2025.

„Even with a functioning EPI, Europe would guarantee its strategic independence in payment transactions,“ says Bofinger. It would also save taxpayers a lot of money. The basic functions of the digital euro should be free of charge for the population. The ECB has not yet specified which additional functions will be available for a fee. However, according to an estimate by the EU Commission, the introduction of the digital euro could cost a low double-digit billion euro amount.

For the ECB and the national central banks, these are billions well invested. The digital euro would not only be free of charge for the population in its basic function, but would also reduce fees for merchants compared to the use of Visa, Mastercard and co.

Bofinger and Commerzbank chief economist Krämer do not believe that the digital euro will be significantly more efficient than the existing payment systems. „The costs of using the digital euro will indirectly end up being borne by consumers,“ says Krämer. When the low fees that banks are allowed to charge merchants for digital euro transactions are not enough, the costs would have to be generated elsewhere.

For Bofinger, financial institutions are the overall losers with the digital euro. „The operational side will be passed on to the banks after the introduction of the digital euro, so I can understand the banks' reservations,“ says Groß. One of the banks' concerns is that customer deposits will flow towards the digital euro on a large scale, threatening their business models. Or that, in the worst case scenario, the outflows could even jeopardize financial stability in the event of an economic crisis.

To prevent this, the ECB wants to introduce a holding limit for the digital euro. This could range from several hundred euros to 3,000 euros. The central bank has not yet decided on this. Despite the limits, consumers will still be able to pay larger amounts in euros. If the available amount in digital euros is not enough, money will be converted from the linked bank account into digital euros and sent directly to the merchant. The merchant's bank, in turn, will immediately convert the digital euros back into fiat money and credit the merchant's bank account. Whether the digital euro will be a success after its presumed introduction is still an open question. This will largely be decided by consumers when they choose their means of payment at checkouts and online stores in the eurozone.