Deutsche Bank Says the EU is Far Behind on Digital Innovation, Predicts CBDCs Will Replace Cash

Deutsche Bank’s research division is out with an edition of Konzept that tackles contemporary political and economic issues while looking towards the future.

One area of focus is digital innovation and how it impacts the European Union’s ability to compete – globally.

According to Deutsche Bank, Europe is lagging when it comes to digital transformation as the US and China lead the race.

The document asserts that Europe lags far behind other countries and COVID has made the gap even starker. To quote the report:

Europe must therefore start closing its digital gap with the US and China and this must be a focus of new investment. While the EU has become a global rule setter for the digital economy, as exemplified by its GDPR standards, it lags far behind on digital innovation. Indeed, as the digital age as hit full stride over the last 20 years, total factor productivity in the euro area has grown half as fast as that in the US.

While the EU has talked up the need for a digital transformation, its efforts to date have been disappointing. The digital agenda has been underfunded, accounting for only one percent of the upcoming EU budget. This is being addressed with the Recovery Fund, which targets 20 percent of its spending on the digital agenda, but implementation questions remain and larger support is still needed to help Europe narrow the gap in R&D spending in the digital sphere. 

The authors believe that “deeper equity markets” would aid early-stage innovation. In fact, Deutsche Bank says this is “key if the EU is to challenge US dominance.”

Regarding Central Bank Digital Currency (CBDCs), the report sees digital cash as a foregone conclusion. The authors state, “in the long term, CBDCs will replace cash.”

“Central banks are slowly beginning to rethink the seventeenth-century cash model and accelerate the development of central bank digital currencies (CBDCs). But this is taking time, especially in advanced economies where interest rates are low and privacy is a major concern.

The great winners in this trend are the US card companies, such as Visa and Mastercard. They wield significant power to set prices, which
is not great news for retailers or consumers. Moreover, considering today’s tense global trade context, it could foster retaliation against US card companies.

For this reason, public and private institutions should cooperate to design alternatives to credit card payments, thereby removing middlemen fees. Good models, which we describe later, include payment platforms such as Swish, Alipay, and WeChat Pay.”

You may view the entire report here.

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