Digital euro sparks sovereignty battle between EU governments and ECB

BRUSSELS — A battle is brewing between Europe’s most powerful nations and the European Central Bank (ECB) over control of a new monetary tool that both sides fear could destabilize the continent’s banking system if mismanaged.

At the heart of the conflict lies the digital euro — a virtual counterpart to euro coins and banknotes. For years, the ECB has been developing the instrument, envisaging a pan-European payment challenger with the ability to rival United States heavyweights like Visa and Mastercard.

But as the project nears reality, a tug-of-war has erupted. Several European Union governments, including France and Germany, argue the ECB has gained too much control over one crucial aspect: how much digital currency citizens will be allowed to hold in “wallets” backed by the central bank.

While it may seem like a dry technical issue, the stakes are enormous. Politicians and technocrats worry that if the limit is set too high, citizens could pull vast sums from traditional banks during a crisis, jeopardizing the stability of the entire banking system. Some are also concerned that any cap could infringe on personal financial freedom, stoking fears of a “Big Brother” state, according to one diplomat, who like others mentioned in this piece was granted anonymity to speak freely about a sensitive issue.

The struggle is raising a fundamental question: Where does the central bank’s authority end and that of EU member countries begin? Thirty years after the ECB became the bloc’s chief monetary guardian, the clash is forcing a reassessment of the delicate balance between politics and central banking.

For some, it’s a necessary pushback against the ECB’s overreach. But in Frankfurt, officials view it as political meddling in a realm that should be free of it. At its core, as one diplomat candidly put it, the dispute is less about technicalities and more about a “battle for power.”

Technocracy vs. democracy 

Over 100 central banks have explored the idea of creating a national digital currency, spurred into action after Facebook’s ill-fated attempt to launch a global cryptocurrency, Libra, in 2019 sent shockwaves through the financial world. 

While many of these efforts have since fizzled out, the ECB has remained resolute, championing the digital euro as a game-changing alternative to existing payment systems — one it hopes will loosen Europe’s dependence on dominant U.S. and non-EU payment services, which currently handle around 70 percent of EU payments. 

But the central bank’s relentless advance has also spooked key member countries, which now view the project as dangerously technocratic. In Brussels, they’re leveraging their political influence in an attempt to curb the Bank’s power in ongoing negotiations over crucial aspects of the digital euro’s design.

Under the draft regulation being worked on by lawmakers and governments, the ECB alone would decide how much digital currency citizens can hold in their wallets.  

Frankfurt sees this as consistent with its vision of the digital euro as an expression of European monetary sovereignty. Moreover, officials familiar with the discussions point out that the central bank is the only authority permitted to adjust the money supply.

However, at least nine countries disagree. Before the summer, a group that included Germany, France and the Netherlands argued that Frankfurt’s exclusive monetary competence should not be used as an excuse to “limit their decision-making power,” according to notes from a meeting shared with POLITICO.

Diplomats further asserted “political supremacy” over the matter, explaining the digital euro was not just a monetary tool but a broader financial services matter that could reshape how Europeans handle everyday payments.

The EU’s treaty gives the ECB very strong legal privileges on regulating money supply, but only qualified ones over banking supervision and payments. It also explicitly allows the Council of the EU and European Parliament to “lay down the measures necessary for the use of the euro as the single currency” — albeit “without prejudice to the powers of the European Central Bank.”

Financial stability, handed down from on high

Some member countries are also deeply concerned about how their citizens will receive a project devised by technocrats they suspect as being out of touch. 

“You can create something in an ivory tower,” said one Brussels-based executive familiar with the discussions. “But will it actually be used in a market?” 

Another area of concern is that allowing the ECB to set the limit would leave the institution with exclusive influence over a new tool that could have outsized effects on banking stability.

The ECB argues that ensuring the soundness of banks is a core part of its supervisory responsibilities, given that such institutions are the main conduit through which it conducts its monetary policy.

Many member countries, however, are not convinced. They argue it is the legislature that defines many of those supervisory responsibilities. They also don’t trust the ECB to cut slack with banks they feel it is their patriotic duty to protect. 

But Frankfurt, along with the European Commission, has warned that allowing governments to set the limit could expose the independent central bank to political pressure, according to two people familiar with the discussions. Another European official worried that politicians might cave to popular demands to raise the limit, hurting banks. Ironically, many bankers also now side with the ECB, after it rolled out a number of features designed to reduce the threat to their businesses. 

Stephen Cecchetti, a professor at the Brandeis International Business School, agreed that the digital euro was primarily a payment system infrastructure, but said the holding limit should be decided by the same people deciding if EU citizens can use €500 notes: the ECB’s Governing Council. 

These kind of complaints suggest that “politicians don’t like the fact that the technocrats in their countries took this role,” he said, adding if they have an issue with that “they should complain to their central banks.”

But member countries haven’t given up. One possible compromise is to let legislators set the parameters within which the ECB operates but to give the Bank the final say.

Even so, that might not do much to resolve the broader worry — that a project intended to save Europe from the overarching economic dominance of U.S. tech now threatens to become a risk in its own right, should the ECB forge ahead without adequate democratic support.