Will the digital euro come online?

This is an audio transcript of the FT News Briefing podcast episode: ‘Will the digital euro come online?’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, May 18th, and this is your FT News Briefing.

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The US is going into a big presidential election next year, but can it also stay focused on Ukraine? And investors are pushing Japan’s stock index to highs not seen since the late 1980s. Plus, Europe’s central bank is planning for a digital currency, but a lot of Europeans are scratching their heads.

Martin Arnold
It seems like it’s only the central bank that thinks this is a wonderful idea.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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Senior European officials tell the FT that they’re worried about the 2024 US election, specifically that the presidential race would discourage sending more military aid to Ukraine. 2024 elections in the US are expected to be divisive. The Republican frontrunner is former president Donald Trump, and he’s criticised President Joe Biden for sending too much money to Kyiv. US officials say there’s preapproved funding for Ukraine until about October. That should cover the counter-offensive expected to start in the next few weeks.

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Japanese stocks keep steaming ahead. This week, the leading Japanese stock index hit a 33-year high, making Tokyo one of the strongest markets this year. The FT’s Kana Inagaki says investors see less geopolitical risk in Japan compared to China.

Kana Inagaki
So some of the money that was, that used to be allocated to China are now being moved to Japan. And because Japanese companies still obviously have a very high exposure to the Chinese economy, you know, it also has the benefit of if there is an upside in the Chinese economy, then you can actually get that benefit from being exposed to Japanese stocks. So I think there’s one geopolitical element to it, but also there has been this longtime reform and corporate governance in Japan. I think shareholders are finally starting to realise that and also management as well, that there’s an increasing awareness that obviously companies need to increase their returns for shareholders. And that’s actually starting to play out in various corporate actions that executives or CEOs are taking.

Marc Filippino
And also, as I understand it, a certain very well-respected American investor visited Japan last month and expressed confidence in Japanese companies. Right?

Kana Inagaki
Certainly Warren Buffett being in Japan, I think, has sent a positive message here. But also, I mean the, one of the messages that Buffett’s investment in Japan kind of underscores is that, you know, there are so many undervalued companies in Japan. It’s taken a very long time for global investors to have a closer look at Japan. And having Buffett here and having that message reinforced certainly did have a positive impact as well.

Marc Filippino
Kana Inagaki is the FT’s Tokyo bureau chief.

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European central bankers are getting ready to roll out a digital euro. Now, this would be a huge deal because it would really change the way that the European Central Bank issues money. But central bankers are struggling to convince people why this is a good thing. And earlier this year, there were even street protests in Amsterdam against the digital euro. To find out more, I’m joined by the FT’s Frankfurt bureau chief, Martin Arnold. Hi, Martin.

Martin Arnold
Hi, Marc.

Marc Filippino
So what would a digital euro look like? I mean, look like in the sense like on your screen, what is the difference between paying electronically with a credit card or Apple Pay and the digital currency that we’re talking about here?

Martin Arnold
So from the consumer’s point of view, there would not be a great deal of difference. It would be a euro that shows up on a screen. It’s not gonna be massively different. There’s one thing that the ECB talks about, which could be an extra feature, which is that it could be usable for offline payments. So in other words, if you were not connected to the internet, you could still pay somebody with a digital euro. And that’s the idea is that would mirror more the use of cash.

Marc Filippino
OK. So can you remind me why the ECB is spending so much effort on creating a digital common currency?

Martin Arnold
OK. So, I mean, the ECB has a few concerns, including the decline of cash. And I think the pandemic caused that trend to accelerate. They also worry about other kinds of digital currencies, so stablecoins, for instance, or some of the digital currencies that are being launched by other central banks. For instance, the potential that China could launch digital yuan has got some people here concerned. You know, the digital world doesn’t have the same national borders. If people were in Europe would say, “OK, I wanna buy stuff from . . . using Alipay” or “I wanna buy stuff from . . . on Tencent chat. And the Chinese actually say, “Well, why don’t you buy some digital yuan and you can then buy all this cool digital stuff.” So the fear is, you know, that in that digital world, people in Europe might start to use digital yuan and that could erode the monetary sovereignty of Europe. I guess that’s the rather vague and amorphous fear that they have.

Marc Filippino
And what does the average European think about the idea of a digital euro?

Martin Arnold
Well, with most folks are a bit confused as to why the ECB is planning to launch this, because at the moment it seems like it’s only the central bank that thinks this is a wonderful idea. And most other people, including the banks, consumers and even politicians, are scratching their heads and saying, “Well, we can’t really see what’s the problem that this solution is meant to fix.” I think a big fear, though, that a lot of people have is that the central bank will know what you’re spending your money on and therefore the government ultimately will be able to track what you’re spending your money on and potentially to control that.

Marc Filippino
Now, as I understand it, banks also don’t really like the idea of a digital euro. Why is that?

Martin Arnold
Well, there’s a couple of big reasons. One is that they worry that a central bank digital currency could make bank runs more likely because if you think about it, a digital euro is a direct claim on the central bank. So it’s ultra-safe because the central bank is never gonna fail. And you have a direct claim on that central bank. So if, as a customer of the bank, you have the opportunity to transfer your money out of bank deposits and into digital euros, then that may not be particularly attractive most of the time. But in a banking crisis or a big financial crisis, then that could suddenly look extremely attractive.

The other reason is the ECB has said that the digital euro should be free to use for consumers. And they have said that they will provide the digital euros to banks, but they want the banks to do the day-to-day processing. And for instance, you know, know your customer, the anti-money laundering, all those kind of checks. So the banks are gonna have to do a lot of work on this, and they’re not convinced that they’re gonna get paid for it. So they don’t like that idea too much either.

Marc Filippino
Martin Arnold is the FT’s Frankfurt bureau chief. Thank you, Martin.

Martin Arnold
Thanks very much, Marc.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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