One of the biggest concerns about central bank digital currencies (CBDCs) is that they will undermine the financial system. In short, money held as a CBDC isn’t held in a bank, and therefore can’t be used to fund private loans. Worse yet, the issuance of a CBDC could amplify the frequency and severity of bank runs. The European Central Bank has recognized this risk and tried to argue that its CBDC (the digital euro) would not compete with the private sector. However, at the same time, the central bank insists that it “needs” a CBDC to compete with foreign businesses.
European officials have made it no secret that they dislike Europeans using services based in America and other countries:
- “The reason I’m personally convinced that we have to move ahead [with a CBDC] is a situation like the one we are in now. … I don’t want Europe to be dependent on an unfriendly country’s currency … or dependent on a friendly currency [that] is activated by a private corporate entity like, you know, Facebook or Google. … I don’t want Meta, Google, or Amazon to suddenly come up with a currency that will take over the sovereignty of Europe.” – European Central Bank President Christine Lagarde
- “Let me reiterate: there is no competition between public and private solutions. … The digital euro will [ensure] that we can keep payments—both physical and digital—working at all times, without depending on decisions made outside Europe.” – European Central Bank board member Piero Cipollone
- “To address the increasing challenges to the Union economy and the Union’s strategic sovereignty, the [digital euro] should aim to reduce dependence on non-European providers.…” – European Parliament
- “The digital euro, for example, can reduce the currently still high degree of reliance on a handful of non-European enterprises in the field of electronic payments.” – Deutsche Bundesbank President Joachim Nagel
- “The digital euro would remedy this situation and strengthen Europe’s strategic autonomy in payment transactions by offering a European alternative to non-European card systems and Big Tech companies.” – Deutsche Bundesbank board member Burkard Balz
Yet, much like how misguided the European Central Bank is in marketing its CBDC as “freedom money,” officials have also missed the mark here. What they never mention are some of the reasons why Europe does not have these services built on its own soil.
Laws and regulations in Europe have consistently made it harder than ever to offer financial services. And those barriers prevent innovative companies from reaching the next level. Rather than being free to focus on serving customers, firms must navigate a maze of red tape: customer-surveillance mandates, extensive reporting rules, and persistent regulatory fragmentation across member states. Despite the promise of a single market, companies still need separate licenses and must comply with different rules in every country where they operate.
Adding insult to injury, price controls—such as caps on interchange fees—prevent new entrants from generating the revenue needed to manage these compliance burdens.
There is also a deeper problem with the central bank’s claim. Consider a simple question: How would a CBDC compete with foreign financial services while sparing European businesses? Every euro held as a CBDC is a euro that private businesses cannot use to fund loans. Every person who uses the CBDC is a customer who isn’t using a private financial service. Whether a bank is based in the United States or in Germany does not change that.
Even then, suppose the central bank can wave its wand and only affect foreign businesses. Where does the line get drawn? If an American business buys a European business, does that business then get added to the blacklist? Is there some sort of commitment that businesses will be required to sign stating they will “remain European” for the foreseeable future or face retaliation?
The European Central Bank has gradually backed away from claims that the digital euro would promote financial inclusion and other unfounded benefits I debunked in my book. However, the central bank’s new marketing campaign is bizarre. Both the claim that the CBDC would be a tool for freedom and the claim that it would only compete with foreign businesses border on false advertising.