The rise of dollar-linked stablecoins threatens Europe’s push to elevate the euro’s global standing and may ultimately weaken the European Central Bank’s control over the economy, three ECB officials told POLITICO.
Their comments come following a seminar on stablecoins — cryptocurrencies pegged to the value of official currencies — held alongside the ECB’s regular policy meeting in July.
Policymakers’ scrutiny of these fast-growing digital assets has also increased as their market value has more than doubled — from $125 billion to roughly $255 billion — in under two years. Nearly 99 percent of that is tied to the U.S. dollar.
Officials fear the increasing adoption of stablecoins could entrench dollar dominance in global finance and quash any hopes of the euro becoming a serious contender to the U.S. currency.
“This trend hurts Europe’s efforts to boost the international role of the euro and the geopolitical influence that comes with it,” said one Governing Council member, granted anonymity to speak freely about a sensitive topic.
The recent U.S.-EU trade deal served as a stark reminder of how much U.S. dominance over the global financial system affects the transatlantic power balance. Acutely aware that Europe is punching below its weight, ECB President Christine Lagarde urged Europe’s leaders to seize the “euro moment” created by the shift in the global order to boost the role of the single currency.
The U.S. administration has supported developing dollar-linked stablecoins as a way to shore up the greenback, even as uncontrolled budget deficits, erratic trade policy and political interference in monetary policy and economic data reporting all work to undermine international confidence.
Most current stablecoin activity is concentrated in emerging markets, prompting ECB executive board member Piero Cipollone to warn of “destabilizing effects” as a result of “digital dollarization”, particularly on emerging markets and less developed economies. But ECB officials warn that if European consumers turn to dollar-backed digital assets in large numbers, it could pose a significant risk to control of the money supply in the eurozone.
“Should U.S. dollar stablecoins become widely used in the euro area, whether for payments, savings or settlement, the ECB’s control over monetary conditions could be weakened,” Jürgen Schaaf, a long-time digital euro advisor in the ECB’s Market Infrastructure and Payments department, said in a blog post last week. “Without a strategic response, European monetary sovereignty and financial stability could erode.”
Best defense
For years, ECB officials have framed the launch of a digital euro as Europe’s most effective response to the threat posed by foreign digital currencies. The goal is to provide a trusted, euro-denominated alternative that would make it safer and easier for citizens and businesses to stay within the eurozone’s monetary framework. A digital euro would offer the advantages of digital currencies without the currency substitution risk.
Lagarde has redoubled her efforts to move the project forward, urging lawmakers to act swiftly. “A legislative framework to pave the way for the potential introduction of a digital euro should be put in place rapidly,” she told the European Parliament in June, calling it a “strategic priority” to address the risks posed by stablecoins.
According to one member, the Governing Council remains skeptical of stablecoins, echoing concerns voiced by the Bank for International Settlements that they fail to meet the standards of “sound money” and suffer from insufficient regulation.
Another colleague, however, acknowledged there may be a limited role for euro-linked stablecoins serving as a bridge between the two systems until the digital euro is launched, which could still take several years. Similarly, Schaaf noted that they “could serve legitimate market needs” and “could also reinforce the international role of the euro.”
There tends to be a broad divide between politically left- and right-leaning economists, with the latter generally more open towards supporting a technology that has been largely advanced by the private sector.
Economists Jens van ’t Klooster, Edoardo Martino, and Eric Monnet are convinced that mimicking the U.S. stablecoin model would be a strategic misstep. “This is neither realistic, given the incumbency advantage of the dollar, nor is euroization of third countries through risky stablecoins per se good for the EU,” they wrote in a recent paper for the Center for Economic Policy Research.
Instead, they urged Brussels to focus on positioning the euro as a globally trusted, safe asset — backed by sound institutions and regulation.
“The EU should stick to promoting the internationalization of the euro as a safe asset that can be held without constraint,” they argued. Third countries may then use the euro to offset the risk of stable coin-driven dollarization, raising long-term demand for the single currency.
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