Policy makers in the EU see the writing on the wall. They will not completely admit it but the euro's future is one of headwinds.
The EU as an economic zone is in decline. Germany, the largest economy, is no longer competitive on a global scale. The zone has very little technology, falling completely out of the AI race. Regulation has crippled innovation, something that is extending into crypto. Then we have the demographics of the region, something that will have a major economic impact in the future.
At the same time, there is some disagreement within the Union over policy. The situation with Ukraine is causing a rift among some countries, with Hungary being the most vocal.
All of this is going to feed into the decline of both the euro and the EU.
Yet, in spite of this, the leaders believe they can still maintain control. It is something that gets more laughable with each passing year. With the expected explosion of stablecoins, the EU is going to, once again, feel what demise feels like.
European Leaders Fear USD Stablecoins
Policy makers seem to think a Central Bank Digital Currency (CBDC) is the answer. This is their answer to combat the rise of privately issued stablecoins.
We are bound to see this implode.
What gets completely overlooked is nobody wants the euro. Stablecoin adoption is exploding, with the USD accounting for 99% of the stablecoin activity. The acceptance is 2nd and 3rd world countries is increasing.
Here is the crux of the issue. The euro is a regional currency, utilized since there are no other choices. However, as entities (and individuals) have options, the euro is going to lose out.
The reason for this is we are looking at digitization in action. That means network effects are the driver of success. When it comes to currency (medium of exchange), nothing compares to the US dollar.
It is a harsh reality that European leaders are now facing.
European Sovereignty At Risk
The Europeans are afraid of losing their sovereignty. This is not coming from the citizens since that was lost long ago. Instead, we see the policy makers in fear that they will become obsolete.
Most still look at central banks as having control over policy. I contest this point since the power was usurped. Interest rates have little impact when the largest borrower is government. Politicians spend regardless of what the rate is.
Nevertheless, alarm bells are going off.
European authorities are sounding stronger warnings that the growing reliance on USD-backed stablecoins could undermine the euro’s sovereignty and disrupt the financial system. As the popularity of stablecoins surges across the region, officials are under rising pressure to promote euro-denominated digital assets.
This reality heightens policy worries. If digital dollars become the mainstay of European commerce and savings, the ability of the European Central Bank to steer monetary policy and support the euro’s standing could suffer. The ECB has cautioned that large-scale USD stablecoin adoption could “undermine the euro’s sovereignty and financial stability.”
Here is where the fallacy of central bank power comes in. A currency does not have value because bankers have the magical ability to pull economic levers with precision. Instead, it comes from the economic productivity that is tied to the currency.
If the European economy continues to slide, the most immediate impact is on the currency. Confidence wanes as uprising occurs.
Again, the EU is far behind in technology. Whether we look at AI, space, or compute, it is trailing. Crypto development has seen some favorable results due to early clarity, something that the United States is about to counter.
Asset Backed Stablecoins
Any company that sets up an asset back stablecoin with the euro is bound to lose. We are seeing the same framework applied, where this coin is to be backed with euro based assets, specifically ECB debt.
The problem is the EU is one of the leading candidates to default on its debt (in a race with Japan). This means the asset backing is going to be worthless.
We already have a situation where major banks around the world are avoiding ECB debt. They realize it is only a matter of time before the onerous commitments made fail. The Union never consolidated the debt from the individual countries when it formed its currency. This means contagion will spread across the region. When the bonds in one country fail, it will set off a storm of fear.
Demand will dry up quickly.
Of course, a study of history shows that European defaults and currency cancellation are the norm. This is the track record of the Europeans. Thus, it should not be a surprise that the same playbook will be used.
What happens to the stablecoins that are held when the asset backing is worthless? We all know the answer to this.
The EU will likely try to counter this with a CBDC. Here we see policy makers believing in their own egos. People are losing confidence in government and a CBDC is the last thing people will trust.
As for the United States, it is not in great shape but it is the best house on the block. The network effects generated by stablecoins will ensure the USD has no competition. It will swallow up the value of every other medium of exchange out there.