The Digital Euro Enters the Final Stretch: Will Europe Gain Independence from US Payment Giants?

Translated by Elisa Sparvoli

At the presentation of the icons and designs selected for the new banknotes, ECB President Christine Lagarde made it clear that coins and banknotes will remain a cornerstone of our European economic system, despite the growing digitalisation of payments.

So why are we talking about both newly designed banknotes and a digital euro?

Simply put, the two can and should go hand in hand, without excluding one another. In economics, even old approaches can prove useful again, and no economic theory ever disappears for good. While the purpose of banknotes and coins is well established, given that we have been using them for thousands of years, the digital euro would serve not only a financial purpose but also a political one.

As far as its financial purpose is concerned, the European Commission has designed a public digital currency, available to every user through a digital wallet. It will have a spending limit, which is yet to be defined, and will allow users to make online and offline payments, just as they do today with debit and credit cards. The main difference is that the digital euro will be issued by the ECB and distributed through payment service providers, unlike current private payment systems such as Visa or Mastercard.

And this is precisely where its political purpose comes into play. The European Commission, which began discussions on the digital euro in 2023, is now faced with a euro area of 21 countries, where around 61% of card payments are processed through foreign payment systems (Visa, Mastercard or other private operators).

Basically, the Commission asked itself: how is it possible that, even with our own sovereign currency, we are still so heavily dependent on American payment systems, with all the risks this entails? This dependence has lasted for more than 30 years, but between the exponential growth in digital payments over the past decade and Donald Trump’s return to office, the Commission itself responded by accelerating the process. The aim is to adopt the legislation by the end of 2026, while the digital euro could be introduced from 2029.  It is now the European Parliament's turn toshape the digital euro legislation.

How has the market reacted?

For the moment, not very well. For commercial operators and the private sector surrounding digital payments, the main concern about the digital euro lies in its strong public sector component. For this reason, it could prove less competitive than the privately run systems that are widespread in the United States, where, for instance, the GENIUS Act is being discussed. Passed last year, the legislation provides private stablecoins with a regulatory framework.

For the commercial sector, indeed, the mandatory acceptance of the digital euro, as a publicly issued currency, could distort competition with privately managed currencies. On the other hand, if the digital euro were not made mandatory, there would be a risk of low uptake, which could ultimately make it ineffective.

Moreover, there is a privacy issue: if future governments were to decide how much each citizen could spend through a limit on their digital wallet, they could also, in theory, monitor their spending.

The challenge

Nevertheless, every market doubt and worries, can be summarised in a single aspect which will be a fundamental element in the costituion of the digital euro: commissions on payments.

This is the biggest challenge facing the European institutions, including the ECB, both in terms of reaching a broad agreement and ensuring that the entire digital euro system remains sustainable in the long term.

The responsibility now lies with Spanish MEP Fernando Navarrete Rojas, a member of the European People’s Party (EPP), who is leading the dossier through the European Parliament.

The solutions

The Council, together with the European Parliament, has proposed a “compensation model” (a set of rules establishing how much banks will be allowed to charge merchants for digital euro transactions), based on a single cap calculated using the weighted average of the bank fees applied to comparable digital payment methods across the euro area.

The Parliament would also like to introduce an additional mechanism tailored to individual merchants: when accepting the digital euro at the POS, they should never have to pay more than they currently pay for the cheapest comparable payment method they already accept (No worse off).

For example, if a merchant accepts X, Y and Z as payment methods and X is the cheapest, the fees charged for digital euro transactions should never exceed those charged for payment method X.

However, the Bank of Italy has proposed introducing a minimum purchase threshold (between 10 and 15 euros), below which merchants, especially smaller ones, would not have to pay any fees. Other countries, including France and Spain, are also calling for the harmonisation of the rates applied to electronic payments in order to protect small and medium-sized merchants.

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