Madis Müller, Governor of Eesti Pank and member of the Governing Council of the European Central Bank
Europe is faced with ever-increasing challenges from geopolitical, cyber and hybrid threats to the ongoing war in Ukraine. The recent behaviour of long-term allies has shown that Europe may be unexpectedly vulnerable economically when we are entirely dependent on partners from outside Europe for critical goods or services. The US companies Visa and MasterCard are for example the only providers of card payment services in Estonia and in most other countries in the euro area, and card payments are typically the only way of paying digitally in shops without using cash.
The digital euro that the European Central Bank is currently developing together with the central banks of the euro area would give Europe a strong and future-proof foundation that can independently support the operation of digital payments. The digital euro would also make Europe stronger during a crisis by creating an additional and secure way of making critically important payments if the current payment solutions offered by the banks were interrupted or if the connection to the information systems of the banks was cut.
The digital euro would make Europe stronger during a crisis by creating an additional and secure way of making critically important payments
Introducing the digital euro would increase competition under normal circumstances, and help make Europe less dependent for the operation of its card payments on the global card payment solutions Visa and MasterCard from the USA. This would also give European merchants better options for negotiating card payment fees downwards, which would in the long term benefit everybody in Europe. The banks would also gain because unlike the card payment schemes, the digital euro would not have any fees for using it and for processing payments.
The digital euro has several innovative features that would be important in a crisis. A full-blown cyber attack today on the information systems of a bank could interrupt its internet bank, card payments and cash withdrawals from ATMs. The backup solutions of the banks would help in this case, but within certain limits. The digital euro in contrast could continue to be used while the payment services of the bank were unavailable. The digital euro can be technically independent of the information systems of any bank. This not only gives it the offline function for digital cash circulation, but also allows people to change their bank quickly in a crisis so they can continue using the digital euro. Introducing the digital euro needs Europe to adopt the legal framework for it quickly, because then the European Central Bank and the other central banks of the euro area will be able to move forward with development for the digital euro.
The report by former President of Finland Sauli Niinistö on how to enhance Europe’s civilian and military resilience challenged Europe to set the boldest joint targets, or common denominators in developing its legislation and its financial market infrastructure and to build crisis readiness, preparedness-by-design, in from the very start when creating legal frameworks and infrastructure. In the context of the digital euro, this means building the capacity to ensure that digital payments function independently by creating an alternative payment rail for them to run on alongside global card payments and allowing the offline use of digital cash even when there is no internet connection. The example of Estonia shows what this would mean for crisis readiness in member states of the euro area.
A lasting interruption to the IT infrastructure of private sector payment systems and banks that blocks the digital channels and ATMs of the banks would cause a crisis and lead people and businesses to look to the government for help
Estonia already has digital solutions that function very well as banking apps in smartphones, card payments by plastic or with smartphones, and instant payments between people and businesses that are used every day in almost all financial transfers. Surveys in 2023 and 2024 showed that businesses and the public have a high opinion of the payment solutions available. Solutions originating from the USA dominate though, in Estonia and elsewhere in Europe, as they are very reliable and function around the globe. This prompts the question of what additional value the digital euro would offer in normal times.
Efforts have been made in the private sector for decades, but no real pan-European alternative has yet emerged alongside the global card payment systems. The various conflicting business interests and the large-scale investment needed to create a network that connects all the merchant points of sale across Europe have proved difficult for private sector initiatives to overcome. Experience consequently shows that creating a system for Europe is probably only possible as a pan-European public service that could be set up and operated as the digital euro. The costs of putting the digital euro into circulation and letting it be used would be borne by the euro area central banks, including Eesti Pank, in the same way as the costs of cash issuance and circulation are.
It may be assumed that a lasting interruption to the IT infrastructure of private sector payment systems and banks that blocks the digital channels and ATMs of the banks would cause a crisis and lead people and businesses to look to the state for help. Cash is currently the only backup solution there is, but it is expensive and difficult for a state to distribute cash without the services of the commercial banks. We have set the target of avoiding this happening by designing the digital euro so that it would be able to guarantee that digital euro payments continue to function and offline digital euro cash can circulate even if the payment services of the banks are interrupted for a long time. The digital euro would consequently be a full alternative to cash for payments. This would not however change the advice that it is always wise to have some cash in your wallet alongside your bankcard and to keep some cash at home to cover the expenses of the family for at least a week.
The digital euro app would allow people to save their digital euros in their smartphone, and continue making and receiving payments even when there is no network connection
A reliable digital euro would help the state cope better with interruptions to payment systems and banking services. The digital euro app would allow people to save their digital euros in their smartphone, and continue making and receiving payments even when there is no network connection. The functionality of make offline transactions would need to be integrated into the wallets holding the digital euros so that the digital euro cash circulation could continue to function when online services are interrupted. In a more serious crisis that prevents people accessing their money in their bank accounts, the state would be able to create a backup solution for distributing offline digital euro cash so that people would be able to make critically important payments with digital euros instead of reverting to cash. It would also be able to create temporary backup solutions allowing people to continue spending the funds in their digital euro wallet if the digital channels and services of their bank are unavailable because of a lasting interruption. Further reflection and work will be needed to enable the digital euro to be used for critical business transactions between companies in emergencies.
Today’s political and legal discussions will futureproof the autonomy and resilience of Europe’s payment infrastructure. I believe that the digital euro is one of the most important foundations for that infrastructure as it would make Europe more independent and make the operation of payments more secure and better prepared in the event of any crisis.
If you would like to know more about the digital euro, then I recommend that you read what Piero Cipollone of the Executive Board of the European Central Bank has been explaining this week to the European Parliament about the role and importance of the digital euro.