Keynote Address by Philip R. Lane, ECB Executive Board Member, UCC Economics Society Conference 2025
Cork, 20 March 2025
It is an honor to take part in the annual UCC Economics Society conference. Today, I want to talk about the digital euro, a significant initiative being undertaken by the ECB. Draft legislation has been put forward by the European Commission and is currently being reviewed by both the European Council and the European Parliament.
A few years back, archaeologists uncovered two silver coins at Carrignacurra Castle, located nearby. The first coin, a groat from the 1200s featuring Henry III, was valued at four pennies, while the second coin, dated to the 1400s, depicted Edward IV. These coins reflect a society that viewed precious metals as embodying intrinsic value and closely tied to state sovereignty.
The currency used in Ireland has undergone numerous transitions over time. Between 1927 and the introduction of the euro, the Irish pound (punt) served as the national currency, functioning as fiat money whose value stemmed from government regulation and public trust in the Central Bank of Ireland. The punt was pegged to the British pound sterling until 1979 and was used as legal tender until the euro was adopted by Ireland and ten other EU Member States around twenty-five years ago, solidifying Ireland’s commitment to European integration while decreasing reliance on the UK’s financial system.
The evolution of the Irish monetary system illustrates how monetary systems evolve in response to wider social and economic changes. For example, Ireland experienced periods of free banking where private banks issued banknotes accepted by the public as payment. This aspect of Ireland’s monetary history contributes to the current discussions regarding emerging forms of private money, such as stablecoins, especially within a digitalizing society.
Understanding Our Current Monetary Framework
The Core Functions of Money
To begin, it’s important to outline the three primary functions of money: (i) serving as a unit of account, (ii) functioning as a medium of exchange, and (iii) acting as a store of value. The unit of account helps stabilize pricing by providing a single benchmark for setting prices and wages. The central bank plays a vital role in maintaining price stability through its policies.
The medium of exchange function emphasizes the advantages of using money over barter systems. For example, it is easier for a university professor to receive her salary in euros and pay for various goods and services in the same currency than to search for vendors willing to barter products. The central bank is central to payment systems that facilitate these monetary transactions.
Commercial vs. Central Bank Money
Our monetary system consists of two layers: “central bank money” and “commercial bank money.” These terms emphasize the issuance entity, where central bank money includes physical currency and reserves held by commercial banks while commercial bank money refers to bank deposits created through lending activities. Both forms are interconnected in practice, as the public views them as equivalent.
The Evolution of Monetary Systems
This dual-layer structure of our monetary system has evolved over centuries, resembling the earlier state money exemplified by the coins found at the local excavation. State-issued currency historically ensured public trust in exchanges, while early banking practices emerged to meet the demands of increasingly complex economies. The challenges in maintaining stable monetary instruments paved the way for current banking regulations that ensure a reliable monetary system.
The Impact of Digitalization
As digitalization rapidly transforms economies, we are witnessing significant shifts in payment methods and asset forms. With the growth of e-commerce and digital payment solutions, traditional physical cash usage is declining. This trend raises essential questions about the future role of central bank money and the effectiveness of monetary policy. To maintain monetary stability, the introduction of a central bank digital currency (CBDC) like the digital euro becomes crucial.
Strategies for the Digital Euro in a Modern Economy
The Need for a Digital Euro
The digital euro is proposed as a pragmatic response to the challenges posed by technological advancements. It would ensure public access to central bank money in a digital environment, safeguarding monetary sovereignty and preventing the marginalization of domestic currencies amid the rise of foreign digital assets and ecosystems.
Addressing Payment System Fragmentation
In the euro area’s multi-country context, the digital euro could unify fragmented payment systems. By enabling direct transactions across borders within the eurozone, it would reduce reliance on non-European digital services while fostering competition among payment providers. Furthermore, the digital euro would help maintain users’ privacy, contrasting with many private entities that monetize transaction data.
Geopolitical Considerations and Strategic Sovereignty
Geopolitically, the digital euro is a vital tool in reinforcing Europe’s autonomy within a contentious global landscape. Increasing dependence on foreign financial infrastructures places Europe at risk, and a robust Euro-based digital payment solution grows increasingly essential to regain control over financial infrastructure and protect against economic coercion.
Conclusion
The transformation of our monetary system is ongoing, particularly as we adapt to the digital age. The digital euro is not merely about modernizing payment methods; it represents a commitment to maintaining control over our monetary and financial systems amid evolving technological and geopolitical realities. Ultimately, the issuance of a digital euro will secure Europe’s monetary future and preserve its financial sovereignty.
