Europe considers a digital currency as it strives to counter U.S. and China’s tech dominance

The European Central Bank is engaged on a digital currency as the area seeks to shield itself from tensions with China and the United States.

The central financial institution began investigating the feasibility of a digital euro again in October 2021. This fall, the heads of state throughout the EU may have to determine if the ECB ought to push forward with the following steps, which embody testing the mandatory technical preparations so Europeans can spend digital euros.

“The ECB is worried that the euro zone will end up in a geopolitical and economic sandwich position between the big tech companies of the USA and the payment systems of China without a digital euro. Right now, Europe lacks digital platforms,” Guido Zimmermann, senior economist at German financial institution LBBW, advised CNBC Wednesday.

ECB President Christine Lagarde acknowledged that time throughout a speech in November. “The entry of big techs into payments could increase the risk of market domination and dependence on foreign payment technologies, with consequences for Europe’s strategic autonomy,” she stated.

“Already now more than two thirds of European card payment transactions are run by companies with headquarters outside the European Union,” she added.

Mastercard, Visa, PayPal, Alipay and UnionPay make up the highest world corporations for funds. None of them are European. The first three are American and the final two are Chinese.

Politicians in Europe don’t need customers or companies within the area to turn out to be depending on U.S. Big Tech corporations for funds, Zimmermann stated.

He added that European officers are additionally attempting to keep away from a scenario by which China turns into the only determinant of funds on the “Digital Silk Road” — a landmark Chinese undertaking to spend money on digitalization internationally.

“The goal, I think it is a fixation for some, of ensuring the sovereignty or power of the EU, is the main driver for the digital euro in Brussels, and in Frankfurt,” Daniel Gros, distinguished fellow on the assume tank CEPS, advised CNBC through e-mail.

European officers have for a number of years been debating the necessity to be extra autonomous and much less reliant on different components of the world, however talks intensified within the wake of the Covid-19 pandemic and then once more after Russia’s invasion of Ukraine.

“The relevance of preserving geopolitical sovereignty has increased in recent ECB speeches and publications for a digital euro. This certainly has to do with the outbreak of the Ukraine war and the increasing global geopolitical tensions,” Zimmerman stated.

Lagarde stated in November that a digital euro “is a common European project” and “would essentially serve wider public policy objectives, such as strengthening Europe’s strategic autonomy.”

Recent discussions about Europe’s autonomy have concerned uncooked earth and magnet worth chains, that are seen as crucial within the transition to a carbon-neutral society. They have additionally concerned vitality provides, medical tools and electrical vehicles.

“The concept [strategic autonomy] has its roots in the EU’s defense and security sector. However, it has become increasingly prominent in recent years as a result of the changing geopolitical context characterized by the increasing competition between the U.S. and China,” Antonio Barroso, managing director at Teneo, advised CNBC.

But there’s extra behind the plan for a digital euro.

Zsolt Darvas, senior fellow on the Brussels-based assume tank Bruegel, attributed ECB motion on this space partly to the “growing demand for crypto assets” and the truth that many different central banks are additionally contemplating the event of a digital currency.

“The ECB might not wish to be a laggard in terms of adopting new technologies,” he stated.