Will the digital euro become the money of the future?
Cash is quietly disappearing from our daily lives. While at the start of this century most people still paid with coins and banknotes, today that’s the exception rather than the rule. Debit cards and mobile apps dominate, and the traditional wallet has largely been replaced by a smartphone. Maarten van Oordt, Professor of Money and Banking from VU School of Business and Economics explores what the next step in this evolution might look like: the digital euro.
Author: Mika Linse
A new player in the monetary system
According to Van Oordt, what makes the digital euro unique is that citizens and businesses would no longer rely solely on commercial banks to make digital payments. For the first time, they could hold digital money issued and guaranteed directly by the European Central Bank – as safe as cash, but in digital form. It’s a technical innovation with a fundamental question: should the government itself play a role in everyday payments, or should that remain the domain of private banks?
The ambitions behind it
At EU level, the digital euro reflects a desire to reduce dependence on foreign payment providers and, in the future, on digital currencies tied to the US dollar. Policymakers also hope that a public digital currency will give everyone access to a reliable and secure form of money. A central bank account could offer businesses greater stability in turbulent times. After all, money held at the central bank cannot simply vanish if a commercial bank gets into trouble – providing companies with more security about their funds. The digital euro might also increase competition between banks, since consumers could transfer their balances elsewhere with a single click.
'Online payments with the digital euro would fall under the same strict regulations as regular bank transfers.'
Opportunities and risks
Still, the digital euro raises some concerns. One common fear is that commercial banks would have less money to lend if people move large amounts to the central bank. Van Oordt adds nuance: 'Banks themselves currently hold over € 2.5 trillion in their own central bank accounts. That’s more than €7,000 per euro area resident.'
He points out that there would still be plenty of credit in the system, but the key question is who decides where that money flows. 'If people choose to keep more of their savings with the central bank, its influence will grow while the influence of commercial banks will shrink. Banks might have fewer customer deposits to work with, but that doesn’t necessarily mean less lending, the money would simply flow through the economy via a different route.'
Another important issue is privacy. When you pay with cash, you can do so anonymously. No one knows what you buy or where you spend your money. With digital payments, it’s a different story. Banks are legally required to monitor all transactions to detect suspicious activity. Research shows that many people value the privacy that cash provides, and would like to see similar protection in new digital forms of money.
'The digital euro, as currently designed, will do little to change that,' Van Oordt explains. 'Online payments with the digital euro would fall under the same strict regulations as regular bank transfers.' Policymakers are considering an additional feature that would allow small, more private payments, similar to the discontinued Dutch ‘chipknip’ card. But Van Oordt doubts that this would add much compared to cash. 'Such payments would probably be capped at low amounts, suitable for small expenses at best,' he says. 'And under current proposals, they couldn’t be used for online purchases, even though that’s exactly where cash is not an option.'
'Under current proposals, such payments couldn’t be used for online purchases, even though that’s exactly where cash is not an option.'
Conditions for success
Whether the digital euro will succeed depends on how it is ultimately designed. Van Oordt sees clear potential. 'In theory, the digital euro sounds promising,' he says. 'You could imagine a secure, user-friendly payment system that offers a high level of privacy and even pays a modest interest rate.'
But to reach that potential, the digital euro must meet the needs of citizens and businesses. So far, the plans offer no interest, impose strict limits on the amount people can hold, and offer little extra privacy compared to existing digital payments. 'For most people, the difference between a digital euro and the balance on their bank account will be hard to see,' Van Oordt notes. 'If the digital euro doesn’t provide tangible benefits and still comes with practical restrictions, people will have little reason to switch.'
That’s why Van Oordt believes politicians and policymakers play a crucial role. They must ensure the digital euro is designed to be attractive and genuinely useful. 'That could be the key to success,' he says. 'Otherwise, it risks becoming a well-intentioned but rarely used tool. The digital euro will cost billions to implement, but it could also be a unique opportunity to create a public form of digital money that truly benefits citizens and businesses.'
'If the digital euro doesn’t provide tangible benefits and still comes with practical restrictions, people will have little reason to switch.'
About Maarten van Oordt
Maarten van Oordt is Professor of Money and Banking at VU School of Business and Economics. His research focuses on the future of money, digital payment systems, and the evolving role of central banks. Before joining VU Amsterdam, he worked as a Research Advisor at the Bank of Canada, where he studied cryptocurrencies and central bank digital currencies (CBDCs). His work has been published in leading academic journals such as Management Science, Journal of Money, Credit and Banking, Journal of Financial and Quantitative Analysis, and Journal of Political Economy.
Photography: Chris Gorzeman
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