The president of the European Central Bank (ECB), Christine Lagarde, says Europe is falling behind in the global money race and may soon launch a new digital version of the euro.
The ECB sets monetary policy across the 19-country eurozone, which counts a 350m aggregate population.
Cash usage is declining around the world
The coronavirus pandemic has accelerated the adoption of digital payments around the world, with cash transactions falling both in number and value.
According to Lagarde, who was speaking yesterday at a Deutsche Bundesbank conference on banking and digital payments, eurozone member countries cannot afford to be bystanders in front of this changing dynamic.
She provided data showing the rapid incursion of digital payments across the region, where consumers in many countries, notably Germany, have historically had a strong preference for cash.
According to the ECB’s new payments survey, cash is still the most common way of making small retail payments. Banknotes and coins accounted for 73 percent of all physical retail payments in 2019, Lagarde said.
But almost half of consumers say they now prefer to pay digitally, she said, while the trend towards the greater use of cards and mobile phones for payments has intensified during the pandemic.
She warned that, as a result, the eurozone is now playing catch-up in digital payments.
“Europe has fallen behind in this competition,” Lagarde said.
“The lack of payments integration in Europe means that foreign providers have taken the lead.”
A new global payments medium
Lagarde went on to defend governments’ role in digital currency in the face of accelerating plans by large tech firms to launch their own money.
Private sector firms should not be allowed to create money monopolies
Last year, Facebook announced plans to issue a new digital currency called Libra, for use across the firm’s messaging networks, which count over 2bn global users.
After opposition from regulators, Facebook was subsequently forced to scale back its plans.
Meanwhile, China is moving closer to the issue of a national digital currency, based on advanced private sector payments technology.
In China, Lagarde said, payments have shifted from cash to mobile payments within a decade, but that mobile payments business is now effectively controlled by two private firms.
These are WeChat, operated by Tencent, and Alipay, part of Alibaba.
In her speech, Lagarde said that payment mechanisms can quickly obtain dominance, and private sector firms should not be allowed to create money monopolies.
“State backing is essential for trust in payments and money”
“Payments are subject to strong network effects,” she said.
“The more users a payment system has, the more attractive it becomes to new users. Scale matters—this limits the field and inevitably leads to just a few service providers dominating the payments market,” she said.
And, she went on, “If the bulk of payments are made using digital wallets rather than bank deposits and are denominated in private digital currency with weak links to sovereign currency, monetary sovereignty could be weakened.”
Money printing rights have always been a major source of revenue for governments.
Last year, France’s finance minister slammed Facebook for encroaching on a key area of national sovereignty with its payments plans.
“In a digital world, consumers must have the possibility to pay with sovereign money,” Lagarde said yesterday.
“The planned introduction of a public digital currency can be seen as a means of managing the risks of this digital transition, in order to maintain trust in payments. State backing is essential for…trust in payments and money,” she said.
The ECB president said that the findings of a Eurosystem taskforce on state digital currency are expected to be presented to the public in the coming weeks. This will be followed by the launch of a public consultation, she said.
Sign up here for our monthly newsletter
Click here for a full list of episodes of the New Money Review podcast: the future of money in 30 minutes