by Giles Merritt
A high-stakes political struggle being fought out beyond the public gaze will determine Europe’s future more than any of the crises making headlines – even Ukraine, even Trump. If it ends badly and fails to streamline the eurozone, Europe’s decline risks becoming irreversible.
Europe cannot construct AI-based defences or raise sagging living standards until it revolutionises the risk-averse financial sector. The IMF recently commented that “shallow pools of venture capital are starving innovative start-ups.”
Media interest in reshaping financial institutions is limited to specialist coverage, but grabbing public attention will be crucial. The EU’s press people need to up their game, and fast.
The more immediate barriers that stand in the way are erected by Europe’s feuding banks, competing governments, partisan politicians and self-interested regulatory bodies. Some of them are celebrating the 25th anniversary of the euro, but they should instead be mourning the snail’s pace toward a unified capital market.
Europe’s outdated and rival national payments and savings systems are depriving its industries of funds. Despite Trump’s antics, European money is pouring into the US and elsewhere. Over €10tn in EU funds is invested outside Europe, contributing substantially to foreign investments in American financial assets, which in the last decade have doubled to a massive $70tn.
As well as Wall Street’s magnetic pull, the market for US government bonds, ‘Treasuries’, is also buoyant. When Americans complain of the ‘burden’ of their federal deficit – $37tn and rising – they are really speaking of foreign money managers’ thirst for dollars as a safe haven. Institutional investors opt much less for euros, but if Europe is to finance its security and the costs of ageing, it must rival the dollar’s ‘exorbitant privilege’ as a global reserve currency.
The ‘digital euro’ is the proposed solution. Its champions claim it will transform financial markets, slash transaction costs and combat the dollar’s supremacy. Some say its introduction would boost the euro’s slender one-fifth share of global reserves – the dollar has almost 60% – to nearer a third.
Opponents nevertheless include some of Europe’s major banks. They see the digital euro as “a threat to their profitable activities, particularly in payments and transactions,” according to Lorenzo Bini Smaghi, formerly of the European Central Bank (ECB) and now chairman of the French bank Société Générale.
That would seem to strengthen the case for digitalising Europe’s single currency. The same banks often oppose stablecoins, the increasingly popular digital tokens that offer high-speed, low-cost, cross-border transactions. As these are almost exclusively pegged to the US dollar, it’s argued that the digital euro offers a more attractive alternative for Europeans.
Explaining the digital euro to public opinion is complicated by the fact that it comes in two versions – retail and wholesale. When and if a recent EU summit’s green light is confirmed by the European Parliament, this autumn should see the advent of the wholesale digital-euro for financial institutions. The retail version for general use isn’t expected for at least three years.
This is where a far more effective public information campaign is needed, not just to explain the advantages of an electronic equivalent to coins and banknotes but also to pressure laggards resisting modernisation. Europe’s shoppers use cash less and less – from half of all transactions in 2010 to barely a fifth today – but popular alternatives like Visa, Mastercard and PayPal are US-owned. The retail digital-euro would open the way for euro-backed competitors.
The welter of new types of money, like bitcoins and the myriad cryptocurrencies, makes it especially hard to persuade Europeans that the digital euro isn’t just another new-fangled, if not shady, attempt to tempt their savings away from trustworthy bank accounts. The ECB needs a media megaphone to spread its message that switching to digital cash is safer and cheaper. Just as important are its references to ‘strategic autonomy’, meaning the digital euro could do much to free Europe from American policy whims.
Getting these ideas across to Europe’s voters and investors is a huge challenge. Innate conservatism and the still vivid memories of the sovereign debt crisis and bail-outs some 15 years ago make people reluctant to embrace novelty. Telling them that their familiar financial arrangements and institutions are at the root of Europe’s economic weakness is a gamble that few politicians are willing to take.
Yet this financial conservatism does much to explain the EU’s sluggish GDP growth and rising unemployment, especially of young people, despite growing labour shortages. Economic stagnation in Europe, when compared to the United States, is not for lack of brains but rather of access to finance. It’s high time EU leaders and opinion-formers drove that simple message home.
*The views expressed in this Frankly Speaking op-ed reflect those of the author and not of Friends of Europe.
**Published first on FriendsofEurope.org
By: N. Peter Kramer
