why this, why now, why not?

the digital euro and theories of action

Since Henry’s and my piece on the global dollar system was published (and my FT Alphaville summary, which leaned a bit more on the Euro angle), I’ve been having some interesting conversations, which I think throw a bit of light on our current crisis. Basically, a lot of people still don’t understand why the ECB is keen on doing this itself. I think I do, for a number of reasons which go to the heart of much more general questions of state capacity. The Socratic dialogue in my head goes something like this:

If we grant that the Europeans don’t like being dependent on Visa and Mastercard, why don’t they just encourage the European banks to develop a local equivalent? (This is a popular objection, which is actually the official position of several European bank trade associations and of the rapporteur on the bill for the European Parliament[1]).

To the extent that this isn’t a case of “bionic duckweed” (a cynical objection to a current workable scheme in disguise as advocacy of a hypothetical but probably unachievable future perfect one), I think the obvious reason is that the European banking system has been trying to get their act together on this for ages and keeps coming up with half-ready, half-of-Europe proposals like Wero.

Which isn’t really to blame them – trying to dislodge the Visa/MC duopoly is difficult, for obvious reasons of network economics. The special power that the ECB has is to use its legal tender powers to overcome the network economics by mandating takeup. (As part of the current legislation, anywhere in Euroland which accepts digital payments at all will have to accept the digital euro on the same basis).

Well OK, I get that the co-ordination problem is a bit difficult, but that doesn’t mean it has to be a central bank thing – couldn’t you just pass the legislation to mandate it and have it owned by a private sector consortium?

Two reasons why that isn’t as good a solution. First, if the digital euro and its legal tender status are the basis of the requirement, then any new developments in payments technology can be kept up with just by changing the functionality of the digital euro. If you pass a specific law mandating a particular set of private sector payment rails, then you are going to need to keep amending that law, which at best introduces a load of inertia into the system, and at worst provides opportunities for the whole thing to be torn apart if the political consensus breaks down.

And more dramatically, what I’m now going to start calling the “Washington Post Problem”. If something is in the private sector it can be bought. Anything which can be sold, one day will be sold, and possibly to someone who doesn’t run it properly. A digital euro that’s a statutory function of the European Central Bank is the best guarantee of strategic autonomy, precisely because it’s a digital euro that will always be under the control of the European Central Bank.

But all those things could still be done without having to have everything on the books of the central bank! This is a new thing to do which hasn’t been tried before! Why does a set of independent payment rails need the central bank to effectively be taking retail deposits? This isn’t their core competency!

And here we have it – the thing I regard as the crisis of the age. The answer is, frankly, that the European Central Bank still has a bit of mojo left. It doesn’t regard “doing something that’s new” as wholly impossible and outside its capacity.

If you want to do something, “doing it” is the simple, straightforward way to get it done. Tendering for outside contractors, drawing up a service level agreement and trying to anticipate all the contractual contingencies … that’s the triple-cushion-in-off-the-blue strategy. Just as a plan for building houses which begins with “put a fence around the site and order bricks” is simpler than one which begins with “redefine the duties of local authorities to consider economic growth in planning applications”.

The outsourcing and contracting approach is one that was forced on the public sector, first by ideology and subsequently by necessity. It’s what you do if you don’t respect your staff’s ability to deliver, or if you don’t have the budget to make large capital expenditures. An organisation which isn’t in that position doesn’t need to make the compromise or take the risk. The hollowing out of state capacity is bad, but the fact that we’re on the cusp of forgetting that any other state of affairs is even possible is genuinely worrying.

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[1] There’s a bit of cross-cutting between political and national factions on the relevant committee; some people are taking positions which are out of line with their ideological groupings, but which make sense when you realise that they are either Germans (who are worried about the effect on the deposit base of small savings banks) or Italians (a very card-based financial system that’s a big payer of merchant fees).