## Why Europe Needs a Digital Euro

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**Canonical URL:** [Why Europe Needs a Digital Euro](https://www.imf.org/-/media/files/publications/fandd/article/2025/09/lane.pdf)

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### Motivation for a digital euro
- Ensure that people in a digital world retain the option to make or receive payments in central bank money.
- Supplement physical cash with digital cash to support modernization of the traditional two-tier monetary system that allows both cash and bank deposits as a medium of exchange.
- Preserve the retail role of central bank money as part of safeguards for monetary stability, including consideration of tail risks from future monetary system developments.
- Preserve trust in the convertibility of commercial bank money to central bank money in a context where physical cash may lose relevance.
- Note: The evolution of the two-tier monetary system over the past 300 years has provided a strong foundation for the operation of the broader financial system and has enabled central banks to deliver price stability effectively.

### Monopoly power and network effects
- Payment instruments exhibit exceptionally strong network externalities—value increases as more people use them.
- Central bank money for payments improves economic efficiency by limiting the scope for commercial payment systems to exploit monopoly power and charge excessive fees.
- As digital transactions increase, the option to make payments in digital euros can limit potential monopoly power of firms at the center of private payment networks.
- Public access to central bank money provides a reliable fallback option in case of disruption to the commercial banking system (technical problems or a cyberattack).
- Policymakers want a digital euro to work offline as well as online to maintain this reliable fallback.

### Stablecoins versus a digital euro
- Stablecoins expand the private money universe as substitutes for bank deposits rather than true substitutes for central bank money.
- A stablecoin’s stable value in terms of currency is not intrinsic (unlike a liability of the central bank); a highly liquid backing portfolio does not guarantee convertibility under all scenarios.
- A well-designed digital euro promises to modernize the two-tier monetary system without destabilizing financial institutions or disrupting monetary policy implementation or transmission.
- Appropriately calibrated limits on digital euro holdings can:
  - Provide people sufficient digital cash for transactions.
  - Prevent excessive outflows from commercial banks.
  - Prevent outsize expansion of the central bank balance sheet.
- People will set up digital euro accounts primarily via their banks or other payment service providers, preserving close interconnection between central bank money and commercial bank money.
- If banks and other payment service providers carry out the necessary know-your-customer checks, maximum privacy will be maintained, and the central bank will not be privy to individual account details.

### Unifying fragmented euro-area payment markets
- The euro area payment system is highly fragmented along national lines; customers often rely on non-European card or e-wallet providers to make payments across the euro area.
- Mandating acceptance of a digital euro would generate instant network effects to help unify the currently fragmented market.
- A digital euro would reduce costs for merchants and businesses by providing network infrastructure for an area-wide payment system on a not-for-profit basis.
- It would increase bargaining power vis-à-vis international card networks for both in-person transactions and e-commerce.
- A digital euro promises to enable an area-wide fast payment system at the point of interaction (POI) between customers and merchants—something unlikely to develop without a digital euro given conflicting incentives across operators of legacy national payment systems.
- A standardized, pan-European platform would:
  - Allow private providers to innovate while benefiting from economies of scale of the underlying digital euro network.
  - Reduce costs for consumers and businesses.
  - Allow card and e-wallet providers to focus on additional payment services while the underlying payments travel via the rails of a digital euro system.
  - Separate the basic plumbing of the payment system (the digital euro network) from the delivery of add-on services, lowering the risk of lock-in effects by dominant private payment networks.

### Sovereignty, symbolism, and the retail role of central bank money
- A retail role for central bank money is integral to the sovereign foundations of the monetary system.
- The single-ness, effectiveness, and stability of the monetary system are underpinned by the sovereign (or, in the euro area, the joint sovereignty of EU member states).
- The monetary role of the sovereign includes:
  - Institutional foundations of the monetary system (including the definition and enforcement of legal tender).
  - Maintenance of budgetary discipline required to ensure monetary policy is insulated from fiscal dominance.
  - Delegation of various monetary tasks to the central bank.
- A retail role for central bank money maintains the direct monetary relationship between the sovereign and the citizen and reinforces public understanding that monetary stability is intrinsic to sovereignty.
- The euro is an important symbol of European unity; this symbolic role must be maintained in a digital age.

*Philip R. Lane; F&D; SEPTEMBER 2025*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/09/lane.pdf_