A power struggle is unfolding between Europe’s most influential 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 mishandled.
At the heart of this dispute lies the digital euro, a virtual counterpart to euro coins and banknotes, as reported by POLITICO. The ECB has been developing this tool for years, envisioning a pan-European payment system that could rival American giants like Visa and Mastercard.
However, as the project neared implementation, controversy erupted. Certain EU governments, including France and Germany, contend that the ECB wields too much control over an issue of great importance: the amount of digital currency citizens will be permitted to hold in central bank-backed digital “wallets.”
While this may seem like a technical matter, the stakes are substantial. Policymakers and experts fear that if the cap is set too high, citizens could withdraw significant funds from traditional banks during a crisis, threatening the stability of the entire banking system.
Others argue that any restriction could infringe on personal financial freedoms and heighten fears of a “Big Brother” state, according to a diplomat who spoke with POLITICO.
This debate raises a fundamental question: Where does the ECB’s authority end, and that of EU member states begin? Thirty years after the ECB became the bloc’s chief monetary guardian, this dispute calls for a reassessment of the delicate balance between politics and central banking.
For some, it represents a necessary step back from the ECB’s excesses. In Frankfurt, however, officials perceive it as political encroachment into an area where it should not interfere. As one diplomat put it, this issue is about a “power struggle” rather than technical specifics.
Technocracy vs. democracy
Facebook’s 2019 attempt to launch the global cryptocurrency Libra shook the financial world, prompting over 100 central banks to explore the concept of a national digital currency.
While many of these initiatives have since faltered, the ECB remains committed, advocating for the digital euro as a transformative alternative to existing payment systems, aiming to lessen Europe’s dependence on dominant US and non-EU payment services, which currently handle around 70 percent of EU payments.
Yet the ECB’s progress has alarmed key member states, who view the project as overly “technocratic.” In Brussels, these nations are wielding their political influence to curb the ECB’s authority in ongoing negotiations over critical elements of the digital euro’s design.
Under the draft regulation being negotiated by lawmakers and governments, only the ECB would determine how much digital currency citizens can retain in their wallets.
Frankfurt views this as consistent with its vision of the digital euro as a reflection of Europe’s monetary sovereignty. Moreover, officials familiar with the discussions point out that the central bank is the sole authority permitted to adjust the money supply.
Germany, France, and the Netherlands oppose the initiative
At least nine countries disagree. Earlier this year, a group including Germany, France, and the Netherlands argued that Frankfurt’s exclusive monetary mandate should not be used to “limit their decision-making power,” according to meeting notes shared with POLITICO.
Diplomats also asserted “political supremacy” over the matter, emphasizing that the digital euro is not merely a monetary tool but a broader financial services issue that could reshape how Europeans make daily payments.
The EU treaty grants the ECB strong legal authority over money supply regulation, but only “qualified prerogatives” over banking supervision and payments.
The EU also explicitly allows the European Council and European Parliament to “take necessary measures for the use of the euro as the single currency” “without prejudice to the powers of the ECB.”
How will the ECB set the ‘holding cap’?
Some member states are also concerned about the affordability of a project designed by technocrats.
“You can create something in an ivory tower, but can it really be used in the market?” asked one Brussels-based executive familiar with the discussions.
Another concern is that allowing the ECB to set the cap would grant it exclusive control over a new tool with significant implications for banking stability.
The ECB argues that maintaining bank soundness is an essential part of its supervisory role, as banks are the main channel through which monetary policy is implemented.
However, many member states remain unconvinced. They argue that prudential responsibilities should be legislated and contend that protecting banks is part of their “patriotic duty.”
Concerns over ‘political pressure’ on the economy
Frankfurt, supported by the European Commission, warns that allowing governments to set the cap could subject the “independent” central bank to political pressure, according to sources familiar with the discussions.
Another European official fears that politicians could harm banks by yielding to public demands to raise the cap.
Ironically, many bankers are now siding with the ECB after it introduced several features aimed at mitigating risks to their business.
Yet member states have not backed down. One possible compromise is to let legislators set parameters within which the ECB would operate, while leaving the final decision to the bank.
Still, this approach may not guarantee the project’s success in reducing Europe’s reliance on the “overwhelming economic dominance” of US technology.
Ultimately, this initiative could become a liability if the ECB proceeds without adequate “democratic support.”
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