The European Union (EU)’s digital euro proposal has emerged as part of a broader set of policy responses to bring the bloc’s financial system to the digital age, ensure digital sovereignty and strategic autonomy in payments, and strengthen the currency’s international role.

But according to Fernando Navarrete, a Spanish economist and politician, and a member of the European Parliament, the digital euro proposal will actually introduce greater risks than benefits, and should only be considered as a last recourse.

In a new report published by Círculo de Empresarios, Fundación ICO, and Fundación Instituto Español de Analistas, Navarrete criticizes the digital euro proposal, arguing that in its current form, the retail central bank digital currency (CBDC) completely ignores recent private-sector progress toward interoperability, overlook intermediate options like regulatory sandboxes and standardization, and introduce issues relating to privacy and financial stability.

Balancing resilience, sovereignty and innovation

Instead, Navarrete advises for a more coherent and future-oriented approach that balances resilience, sovereignty, innovation, and democratic legitimacy, and which emphasizes public-private collaboration.

In this scenario, the private sector would deliver pan-European solutions, while the ECB acts as a standard-setter, infrastructure provider, and enabler, rather not a competitor in retail payments. EU institutions, meanwhile, would focus on regulatory harmonization, interoperability, and targeted support rather than replacing market initiatives.

This strategy should be based on three pillars:

• Delivering a competitive, innovative, interoperable private-sector payment infrastructure mobilizing commercial bank money;
• Offering a targeted and privacy-preserving offline digital euro for resilience and inclusion; and
• Establishing a wholesale CBDC to support financial market integration and international competitiveness.

In this evolving payment landscape, Navarrete believes that the European Commission (EC), together with the European Parliament and the Council, should act as facilitators of convergence rather than direct service providers. They should focus on fostering innovation in the private sector by promoting interoperability, ensuring consistent regulatory frameworks across Member States, and supporting adoption through targeted incentives and proper regulation and supervision.

The European Central Bank (ECB), meanwhile, should act as a neutral enabler, concentrating on supporting the development of technical standards, ensuring the availability of robust infrastructure, and promoting interoperability among payment systems.

Navarrete also advises for the creation of an offline digital euro. This payment method would serve as a complement to cash as a central bank money usable in digital environments. It would offer targeted public value with limited risk to financial stability, citizens’ privacy, or long-term innovation, and might enhance the overall resilience of the payments system.

But more importantly, Navarrete believes that an offline retail digital euro presents little risk to disrupt financial intermediation or market dynamics, as it would operate with clearly defined usage limits and a scope restricted to specific, complementary use cases.

Instead of a retail CBDC, Navarrete advises for the creation of a wholesale CBDC, which he believes can deliver substantial benefits in terms of settlement efficiency, market integration, and strategic autonomy.

Furthermore, because wholesale CBDCs build on the traditional role of central banks as providers of payment infrastructure, they carry little inherent risk. In fact, they can bring clear benefits. By enabling T+0 settlement in financial markets, wholesale CBDCs can help reduce counterparty and operational risks, improve liquidity management, and support the development of the Savings and Investment Union. They also enable cheaper remittances, smoother international trade, and stronger international financial cooperation.

According to Navarrete, these components, aligned with the respective comparative advantages of public and private actors, should, in his opinion, be the EU’s “Plan A”. According to him, this approach offers a more proportionate and effective path forward than a full-scale, general purpose retail CBDC with all its risks and inherent limitations as it is currently proposed by the EC.

A retail CBDC only if private initiatives fail

Navarrete argues that the current retail digital euro proposal should be treated only as a “Plan B”, to be pursued solely if no better alternative proves viable. Should policymakers move in that direction, he stresses the importance of minimizing the risks and shortcomings inherent to a retail CBDC. These risks include potential threats to financial stability, reduced competition, data privacy concerns, and the added burden of new responsibilities in areas such as fraud prevention and anti-money laundering (AML).

While wholesale CBDC are designed for use between financial institutions, retail CBDCs on the other hand, are intended for direct use by citizens through digital wallets. In normal times and especially during financial crises, people may prefer to hold their money in a risk-free digital euro rather than in commercial bank accounts. This would weaken banks’ deposit base, reduce their lending capacity, and create financial fragmentation across the euro area, significantly destabilizing the financial system.

To contain this risk, the digital euro proposal introduces strict limits on how much digital euro any individual can hold. However, these limits are untested and could potentially come under political pressure in times of crisis, Navarrete warns.

Another major concern is privacy. Unlike cash, retail CBDCs, like almost any other digital payment methods, leave a digital trail. Many people fear that the ECB or public authorities in general could monitor transactions, even indirectly, undermining individual autonomy or an erosion of civil liberties. This perception of surveillance can erode trust in the monetary system, weakening voluntary adoption and potentially driving privacy‐sensitive consumers back to informal or unregulated payment channels.

The digital euro, initiated by the ECB in July 2021, aims to develop a fast and secure electronic payment instrument that would complement the euro for individuals and businesses in its existing form as cash and in bank accounts. Arguments and motives for its introduction include the opportunity to expand payment options, to provide a fee digital access to a secure legal tender in the Eurozone, and to ensure monetary sovereignty of the Eurozone.

However, critics are warning of significant risks relating to technological dependencies, privacy trade-offs, and structural limitations. For financial institutions, global consultancy PwC estimates that each EU bank will need to spend about EUR 110 million to implement the necessary changes to support the digital euro. This excludes costs related to offline functionalities, multiple accounts, and merchant acquiring.

Featured image by Who is Danny on Freepik