What will a digital euro bring for citizens?

Monetary policy. Preparations are underway for the introduction of the digital euro. What do residents know about it? What should you pay attention to when designing it? Results of social finance research at the University of Graz.

In October 2023, the Council of the European Central Bank (ECB) unanimously decided to begin preparations for a digital euro. Since then, there has been a contentious debate about its advantages and disadvantages. The basic idea of ​​a digital euro is that not only can printed money be issued by the European Central Bank, but all citizens also have a direct account with the European Central Bank. They can access this using their smartphone via an app (or via a classic bank card).

So far, proposals that stipulate a relatively low upper limit are being discussed. Therefore, the digital euro aims to complement the digital payment options offered by private banks, for example, for online payments and small smartphone-to-smartphone transfers. What goals does the European Central Bank seek to achieve by introducing a digital euro?

The reality is that only a small portion of the money supply in circulation in the Eurozone is printed by central banks. The majority of money is currently “created” by private banks by granting loans. This “creativity” is a process of digital writing, or more precisely: a pure process of expanding the balance sheet.

Private banks create money

Experts talk about “fractional reserve banking.” What this means is that banks should only have a small portion of the money they lend as actual reserves. Currently, only 2.5% of the loan amount must be deposited in central bank funds. The bank only needs to cover €25 of central bank funds to grant a €1,000 loan. Therefore private banks always create additional funds when they grant loans.

It is also called special credit money because it is not issued by central banks. The European Central Bank estimates that general cash (notes and coins) now represents less than ten percent of the money supply in circulation. This fact is not generally known, as our economic and social research shows: in a nationally representative survey in Austria (2,000 respondents), a clear majority of 82% of the resident population knew that the central bank was printing money. In contrast, only ten percent of those surveyed were aware that private banks generate money by granting loans.

A similar picture emerges from our latest survey among decision-makers from politics, business, administration and social partners, which we conducted in Styria in the summer of 2023. Depending on the region, 72 to 88 percent knew that central banks were printing money. However, only a minority were aware that private banks were also creating money by expanding their balance sheets. Therefore, although the majority of money today is created by private banks, only a small minority realize it.

The monetary system is in a constant state of change

Regarding preparations for the introduction of a digital euro: If cash issued by central banks represents a smaller proportion of the total money supply, its ability to influence the money supply is diminished. It follows that control of the monetary system is increasingly shifting from public institutions such as the European Central Bank in favor of private payment service providers.

This development in the monetary system contradicts the idea of ​​money as a public institution. Money can also be thought of as infrastructure, similar to public roads or the electricity grid. The increase in unsecured credit funds from private banks is therefore a privatization of this monetary infrastructure.

The introduction of the digital euro would be an important step in the face of further privatization of the monetary system. After that, the ECB will not only issue money to citizens via private bank ATMs. Alternatively, they can open an account directly with the European Central Bank, which will be covered entirely by public funds (rather than an account in a private bank). The planned introduction of the euro is also justified by the fact that cash is increasingly losing its function as a global means of payment.

Payment without transfers

With the gradual displacement of cash, citizens are increasingly relying on private payment service providers (MasterCard, Visa, Klarna, PayPal). In contrast, you can pay with the digital euro – outside of private financial service providers – without going through printing houses and mints.

Negotiations have been taking place at European level for some time on how to technically design a digital euro. There is debate about the upper limit for the digital euro (currently 3,000 euros) in order not to jeopardize the private banks’ business model. Given the scope and long-term consequences that the introduction of a digital euro would have, public participation would also be desirable from a democratic policy perspective.

In order to create an actual digital equivalent of cash, five aspects need to be taken into account from the perspective of our social finance research. First, it will be necessary to launch an educational campaign by the ECB to educate the population about the difference between public and private money, why this relationship has become unbalanced and what advantages there might be for citizens to avoid complete privatization of the monetary infrastructure.

Second, the digital euro should guarantee anonymous payments in order to prevent reservations on the part of citizens. This also means that the data generated during the processing of payment transactions should not be visible to state institutions or private companies.

Easy access

Third, full adoption of the digital euro should be ensured, from online platforms to parking ticket machines to farmers markets. Fourth, any upper limit should be very generous so that the digital euro can be used not only for small everyday purchases, but also for larger purchases.

Finally, fifth, the digital euro, like cash, should be readily available to the entire population. This means, among other things, that it should be technically independent of whether you own or want to use a smartphone.

A digital euro designed in this way could be a pioneering step toward the (re)democratization of money – provided it is anonymous, global, and inclusive.

Klaus Kramer (* 1962), Doctorate and Habilitation in Sociology, since 2010 University Professor at the Institute of Sociology at the University of Graz.
Head of research in economic sociology.
Jacob Jacir MA (* 1989), University Research Assistant in Economic Sociology, Institute of Sociology, University of Graz.
Nico Tuckner MA (* 1996), Research Assistant in the field of Research in Economic Sociology, Institute of Sociology, University of Graz.

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