Why Europe Needs a Digital Euro

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The digital euro project aims "to ensure that people in a digital world retain the option to make or receive payments in central bank money."
Proposal: supplement physical cash with digital cash to modernize the traditional two-tier monetary system that allows both cash and bank deposits as a medium of exchange.
Historical context: "The evolution of the two-tier monetary system over the past 300 years" has supported the broader financial system and effective delivery of price stability.
Policy implication: prudence suggests preserving the retail role of central bank money, including through the introduction of a digital euro, rather than restricting central bank money to wholesale roles.

Central banks have a mandate "to safeguard monetary stability in all circumstances."
Recommendation: adopt a "cautious yet forward-looking approach" that accounts for baseline scenarios and tail risks in the future development of the monetary system.
Expected outcome: a digital euro "will minimize the likelihood of adverse economic outcomes in the future and ensure the resilience of the monetary system in an increasingly digital world."
Rationale: cash has played a critical role in maintaining trust in convertibility of commercial bank money to central bank money; loss of relevance of physical cash without a digital alternative could jeopardize that convertibility.

Payments exhibit "exceptionally strong network externalities" that can lead to monopoly power in private payment networks.
A digital euro expands use of central bank money for payments, limiting scope for "commercial payment systems to exploit monopoly power by charging excessive fees."
Public access to central bank money serves as a reliable fallback in case of commercial banking system disruption (technical problems or cyberattack).
Design preference: policymakers want a digital euro to work "offline as well as online" to enhance resilience.

Characterization: stablecoins are "best understood as expanding the private money universe—as another substitute for bank deposits—rather than as a true substitute for central bank money."
Key distinction: "A stable value of a stablecoin in terms of currency is not intrinsic (unlike a liability of the central bank)."
Risk point: "Even a highly liquid backing portfolio does not guarantee convertibility under all scenarios."
Conclusion: stablecoins are not an adequate substitute for a central bank-issued retail digital currency.

A well-designed digital euro can modernize the two-tier system "without destabilizing financial institutions or disrupting monetary policy implementation or transmission."
Suggested design element: "appropriately calibrated limits on digital euro holdings" to provide sufficient transactional digital cash while preventing "excessive outflows from commercial banks and outsize expansion of the central bank balance sheet."
Distribution model: people will set up digital euro accounts primarily via their banks (or other payment service providers), maintaining close interconnection between central bank money and commercial bank money.
Privacy safeguard: 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."

Problem statement: "the euro area payment system is highly fragmented along national lines" and customers typically rely on non-European card or e-wallet providers for cross-euro-area payments.
Mechanism: mandating acceptance of a digital euro would create instant network effects to help unify the currently fragmented market.
Benefits for merchants and businesses:
- Reduce costs by providing network infrastructure for an area-wide payment system on a not-for-profit basis.
- Increase bargaining power vis-à-vis international card networks for in-person transactions and e-commerce.
- Enable an area-wide fast payment system at the point of interaction (POI) between customers and merchants.
Innovation stimulus: a standardized, pan-European platform would allow private providers to innovate while benefiting from economies of scale of the underlying digital euro network, reducing costs for consumers and businesses.
Market structure improvement: separating the basic plumbing of payments (the digital euro network) from delivery of add-on services lowers the risk of lock-in effects from dominant private networks.

Argument: a retail role for central bank money is "arguably integral to the sovereign foundations of the monetary system."
Institutional foundations: the monetary role of the sovereign includes legal tender definition and enforcement, maintenance of budgetary discipline to prevent fiscal dominance, and delegation of monetary tasks to the central bank.
Civic relationship: a retail role "maintains the direct monetary relationship between the sovereign and the citizen" and reinforces public understanding that monetary stability is intrinsic to sovereignty.
European dimension: the euro is a "critical mechanism for greater economic and political integration among member countries" and "an important symbol of European unity" that should be preserved in a digital age.

Philip R. Lane, September 2025 — F&D Magazine

Why Europe Needs a Digital Euro
- Why Europe Needs a Digital Euro (Markdown version)
- Why Europe Needs a Digital Euro (PDF)