Could Brexit be the Underlying Reason for Developing The Digital Euro

After the election in December 2019, the British Parliament decided to ratify the withdrawal from the European Union. Factors that influenced Brexit included immigration, sovereignty, anti-establishment politics, among others.

Could Brexit have influenced the development of the digital Euro? Read on to find out as we break down factors that led to the development of the digital currency.

The Growth of Digital Assets

The concept of digital assets is not novel; its penetration and influence have left no stone unturned. The 2008 Global Financial crisis created a path for BTC, and currently, there are more than 4,000 crypto assets. More than 86% of countries are actively working on the viability of their own Central Bank Digital Currencies.

In October 2020, Europe’s Central Bank, which serves as the Apex bank of the Eurozone, presented a report on the potential use, advantages, and implications of the digital Euro. However, the report confirmed that the digital Euro would not replace the existing fiat currency but complement it.

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Digital Euro: A Tool for Enhancing Relevancy

The Digital Euro launch aims at providing a risk-free, accessible, and convenient form of central bank money. Additionally, it would help safeguard Europe’s financial autonomy from private virtual assets and sovereign foreign currencies.

Currency is one of the essential instruments of a country’s supremacy. The invention of crypto-assets pushed the European Central bank to analyze the potential of The Euro becoming digital. The Euro is the second-most commonly traded currency globally. Therefore, Europe is considering a re-entry into the global arena of influence through Euro digitization.

Implementing a digital Euro might not give the EU power to set the rules. However, it can majorly steer the wagon in that direction.

Economic Impact of Brexit on the EU

In a bid to ensure unity and free movement of people, goods, services, and capital within the internal market, European countries created a Eurosystem. It helps enact justice and home affairs legislation and maintain standard trade, agriculture, fisheries, and regional development policies.

According to Financial Times, in December 2017, the Brexit referendum led to a reduction of British income by 0.6%. The referendum also pushed UK’s inflation by 1.7% in 2017. The costs of Brexit were estimated to be at about 2% of GDP.

Most economists also report that EU membership creates a strong positive effect on trade. Hence, Brexit affected UK’s businesses.

Brexit could have motivated the EU’s ambition to strengthen Europe’s power and dominance in the world of payments. The UK was one of the EU’s big three; therefore, Brexit created adverse economic and political effects. 

Some members of the bloc worry that the UK may become an economic competitor. Other experts believe Brexit may reduce the EU’s influence in the global arena. 

This could explain why the EU is working hard to improve its position in the payments market. It could be a hasty resolution to solidify prevailing threats to the EU, such as Brexit.

Why Digital Euro Now?

Like other central banks, ECB is keen on meeting the growing demand for digital assets. The ECB is concerned that the boom of digital assets will mainly benefit foreign currencies and private payments. It accelerated research on the digital Euro after Facebook announced its plans to create its money in 2019.

The Eurosystem designed a digital Euro with the motive of strengthening the monetary authority of the EU. An in-depth evaluation of the reason for the development reveals more political agendas disguised as economic reasons.

With this in mind, the digital Euro may aim to respond to the impact of greater currency competition. Also, it could address a reduction in cash use and the dominance of foreign currencies in the European market.

CBDCs are different from crypto-assets just as much as they are alike. For one, the central bank would manage the digital Euro. 

Perhaps one of the crucial reasons for the push of the digital Euro is the potential reduction in the use of cash. Moreover, the use of the digital Euro could be vital in the preservation of European autonomy by bridging the current cross-border payment gaps. Stressing on G20’s goal of enhancing cross-border payments Banque de France, Bank for International settlements, Swiss National Bank initiated Project Jura. The project aims at examining the viability of coming up with cross-border wholesale CBDC payments.

The digital Euro aims at enhancing user privacy, security, and usability.

Challenges and Prospects

The digital Euro is at a geostrategic advantage hence highly likely to succeed. For any currency, what matters is its usability and functionality. The trust that people develop in a currency significantly contributes to the value of a coin. For the digital Euro to succeed, it has to pass the test at home.

One challenge is the disparity or uneven distribution of technical know-how, skills, and resources in the Eurozone. The economic infrastructures and spending habits of the 19 countries in the Eurozone are different and far from uniform. The preference for the use of cash transactions in some of these zones is still high.

The field of digital currencies is gradually crowding. It is important to remember that one digital Euro will be equivalent to one Euro. It would end up tied to the fiat currency. Moreover, because the ECB would back its value, it would not be as volatile as other cryptocurrencies.

Conclusion

Brexit could be the underlying cause for developing a digital euro, but it is not the main reason. The world is gradually shifting towards digital assets. This is due to their convenience, security, and reliability.

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Still, the development of the Euro is a warranted move that will help strengthen and achieve a harmonized EU market. Also, many see it as a move that will uphold the EU’s sovereignty. It may also command easier cross-border transactions, especially in e-commerce.