The interview was conducted by Yasmin Osman, Stefan Reccius und Elisabeth Atzler.
Translation: Deutsche Bundesbank

Mr Balz, the Bundesbank has been a staunch advocate for the digital euro for years. But why? Surely there are already enough ways for people to pay.

Balz: Cash is and will remain a core central bank product. But people’s daily lives are becoming more and more digital. That’s why we believe it is important for us to offer people a reliable, public sector option. 

But it’s not something the general public appear to feel is lacking so far.

Balz: Actually, I do think that many people would like a payment solution that enables them to pay online and offline anywhere in Europe, or make payments from person to person without corporations from outside Europe tagging along. I am sure they would appreciate a European solution such as this. After all, there is also a sound geo-strategic case for introducing a digital euro. The outbreak of the war in Ukraine has shown that Germany and Europe need to be even more alert to what is good for their sovereignty.

Shortly after Russia’s attack of Ukraine, the major US credit card providers Visa and Mastercard suspended their payment services in Russia. Could you imagine a similar scenario unfolding in Europe?

Balz: I am a dyed-in-the-wool transatlanticist, but there’s no getting around the fact that this is not some kind of abstract nightmare; it is, in fact, technically feasible. We certainly don’t have a negative attitude towards the US payment service providers. They are very important partners. But from a European point of view, we do need our own set of options. The digital euro is a piece of critical infrastructure for Europe and is a top priority for the Bundesbank.

Ms Hachmeister, it’s a strategic option the Eurosystem is throwing a lot of money at. The volume of orders in the calls for applications issued by the European Central Bank (ECB) alone comes to between €430 million and €1.2 billion. Not to mention the additional staffing costs central banks face for hiring new experts. German banks estimate that they, too, would need to invest a further €1 billion.

Hachmeister: Right now, it’s hard to say with any certainty how much the digital euro will cost, especially since we need to distinguish between the cost of setting up the infrastructure and the cost of day-to-day operations. The start-up costs are usually the largest item. We are convinced that the digital euro is worth these start-up costs. 

The digital euro probably won’t be a cheap solution: the idea is to link it to your account so that you can fund your balance from your main account when paying for something. That is technically complex. What is the risk that the digital euro will be a market flop because transactions end up being too expensive?

Hachmeister: I think it’s more likely that the digital euro will boost competition, thereby stimulating business. After all, we will be making parts of the infrastructure available free of charge. Interchange fees that merchants pay to US providers such as Mastercard or Visa as part of other payment schemes will be limited with the digital euro. So the digital euro could make payments cheaper.

Balz: Incidentally, besides merchants, consumer protection associations are the greatest proponents of the digital euro. They are also hoping to see brisker competition drive down the high fees.

But it’s also conceivable that banks will tack a bit of a margin onto the digital euro, meaning that transaction costs in the retail sector do not change at all.

Balz: We would like to see European legislators stake out the most precise fee schedule possible – one with limits that are roughly equivalent, say, to those in place for similar means of payment – such as the girocard scheme in Germany. 

The European Commission’s proposal on the digital euro already envisages a limit of that kind on fees. But there’s still the question of what upper limit should be applied to holdings of digital euro.

Balz: A decision on a holding limit is still pending. In discussions, it ranges between €500 and €3,000. The plan is for these holdings to be immediately funded during a payment transaction if the available amount is insufficient. If this kind of “waterfall” approach is used, higher payments can be made even if the holding limit is low.

German consumers in particular value data protection and anonymity. Yet at the same time, anonymity could facilitate money laundering. How can these diverging interests be accommodated?

Balz: Preventing money laundering is a hugely important topic for us, which is why the introduction of a de minimis threshold is under discussion. Payments for less than that threshold can be essentially anonymous. That wouldn’t be the case for payment amounts above the threshold.

What would be a sensible de minimis threshold?

Balz: I would be very comfortable with a de minimis threshold of €150 – that’s enough to buy essential goods, for example a small gift, a bottle of wine or a book. That would also be a reasonable amount in terms of preventing money laundering. After all, one thing is clear: nobody wants to get embroiled in new risks by implementing a digital currency.

Can the same be said about risks to financial stability? Bank representatives are warning that the digital euro could cause their liquidity buffers to dissipate. This could also limit their scope for lending.

Balz: Central banks are not aiming to get mired in additional risks to financial stability by implementing a digital currency. And that’s why we are going to design the digital euro in such a way that it does not result in uncontrolled outflows of deposits from banks and savings banks. Indeed, this is the very reason why we are discussing a holding limit.

Banks see even a €3,000 holding limit with some concern, and are calling for an upper limit in the three-digit range. How about you?

Hachmeister: The German banking industry could cope with a €3,000 holding limit. Moreover, not everyone would make full use of this limit – not by any means. Many people couldn’t afford to set aside that kind of amount. Nor would it be attractive to do so, given that digital euro holdings don’t earn interest. The digital euro is supposed to be a means of payment, not a store of value.

Balz: We are looking to forge a public-private partnership. We need the private banks and savings banks for the digital euro. I can assure you that the Bundesbank has no interest in potentially opening and managing 85 million digital wallets. Private banks can do a much better job of that.

People probably also have their reservations because some European banks are investing in a new pan-European payment scheme known as EPI. Will the digital euro render EPI superfluous?

Hachmeister: An ideal outcome would be to connect EPI and the digital euro. We need to bring the digital euro to the people, and that’s where EPI could act as a natural distribution channel. This might potentially even give EPI more traction and make it attractive to more European banks. You see, the problem with EPI is that it does not yet cover the whole of Europe. 

At present, only banks from Germany, France, Belgium and the Netherlands are involved in EPI.

Hachmeister: An outcome where the digital euro and EPI are cleverly linked up might leave EPI in a stronger position to complete with US rivals. Brisker competition would be desirable, from our perspective.

The Bundesbank has identified the digital euro as a top priority on its agenda. However, it is not yet certain that European legislators will even implement it. Do you believe a decision will be made before the European elections?

Balz: I personally do not think a decision will be made before the end of this parliamentary term. 

Forecasts for the European elections suggest that, if anything, the digital euro’s potential backers will decline in number.

Balz: Of course, the political framework may change somewhat over the next few years, because by the time the digital euro is potentially implemented – that won’t be managed before 2028 or 2029 – there are going to be parliamentary elections in practically every single EU country. At the end of the day, Europeans have to ask themselves the following question: Given that more than 130 central bank digital currency projects are ongoing worldwide, and as the world’s second-largest currency area, can we afford to – and do we want to – permanently abstain from introducing a digital version of our currency?

Shouldn’t the national parliamentary representatives have a say on a digital euro, in addition to the European Parliament?

Balz: There are relatively clear rules at the European level. These state that national parliaments do not have to agree to the introduction of a digital euro.

But wouldn’t that make sense for such an important project?

Balz: National parliaments have ceded rights to the European level, so the situation is clear in that regard. We did, however, agree voluntarily early on to regularly appear before the Bundestag’s Financial Committee. 

The Eurosystem has invested a lot of money in the digital euro. What happens if the people of Europe ultimately decide against it?

Balz: Correct – we’ve put a lot of work into this project upfront. That might mean drawing the stark conclusion that those efforts didn’t pay off. I don’t expect this to happen, though. I am very confident that the digital euro is coming.

Thank you very much for the interview.

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