“The key to becoming a more sustainable economy is to invest in the transition”

European Commissioner Mairead McGuinness speaks to Neil Stokes, Tax Associate at PwC, about the European economy, the possibilities for a digital euro and sustainable finance

What is your outlook for the European economy in 2023, given the backdrop of the continued war in Ukraine, monetary tightening and the spectre of a recession looming large?

The past few years have been a time of immense change. 

While we are not yet completely out of the woods with the pandemic, people are back at work, and the threat to global health has decreased. 

However, we find ourselves in a very dark time for Europe, and indeed the world, with the Russian invasion of Ukraine on 24 February 2022. The terrible impact has been, first and foremost, on Ukraine and its people. But there are knock-on effects, including dramatic volatility in energy prices, requiring Member States to take action to help the most vulnerable families and businesses. 

The EU is among the most exposed advanced economies due to our proximity to the war and our past reliance on gas imports from Russia. 

Despite these headwinds, the EU economy has shown remarkable resilience. We have thus far avoided recession and energy shortages. 

Political unity of EU Member States is paying off. The Commission worked hard to counteract the worst impacts of the war, just as it acted to avoid the worst impacts of the global pandemic.  

We need the same collective effort for the year ahead to make progress on the transition to net zero and maintain the competitiveness of European businesses. 
We are also strong in our solidarity with Ukraine.

What is your outlook in the medium to long term for cryptocurrencies/decentralised finance, given the recent collapse of FTX?

Digitalisation is a game-changer. We can all see that. It’s causing deep structural changes and creating new opportunities and challenges in the financial sector. 
I can’t say what will happen with crypto in the long term, but the EU is ahead of the curve in acting to regulate these relatively new developments. 

The FTX collapse is evidence that all that glitters is not gold, and it is a cold shower for ‘believers’ in crypto – who see it as the future of finance. 

Our approach to cryptocurrency is to address the clear risks and shortcomings while still enabling innovation to flourish. 

We will soon have the Markets in Crypto-Assets regulation in force, which will bring crypto into the regulatory and supervisory fold. 

We also have a new pilot regime for Distributed Ledger Technology, or DLT, which is the technology that underpins crypto. This pilot will allow financial companies to experiment with DLT for the trading and settlement of ‘tokenised’ financial instruments in a safe environment and let regulators learn from the experience. 

What do you see as the main advantages/disadvantages of cryptocurrencies from a consumer standpoint? Do you see them being used as a widespread medium of exchange in the near future?

Crypto comes with risks, as we’ve seen all too clearly. 

Some consumers invested in crypto, lured by a false promise of value going up and up and up. 

Crypto is a risky investment and subject to volatility. What goes up can also come down – and very dramatically, as some investors have experienced. 

Others have been victims of scams or hacks that are all too frequent in what’s still a largely lawless ‘Wild West’ of crypto. 

There are advantages to blockchain technology. It cuts out the middleman – removing the need for centralised processes and intermediaries. It can make transactions more efficient and transparent by recording key information in an unchangeable format, making it accessible to all market participants. 

For instance, this could make payments cheaper, faster and safer. Blockchain technology also has the potential for the trading and settlement of securities. But those benefits cannot emerge in a Wild West scenario. So, we need regulation, and that’s what the EU is doing.

What are your thoughts on the future of the digital euro and its interaction with the physical euro?

First, a note on the process. It is the European Central Bank that will decide on whether to issue a digital euro or not. But a decision with such huge consequences for people, businesses and economies needs a strong democratic basis. 

This year, the Commission will propose a legal framework to regulate the essential elements of a digital euro, and the European Parliament and Member States will discuss and shape this proposal.

What should a digital euro look like if we decide to proceed? I always stress that the idea for the digital euro is that it will complement, not replace, cash. 

We are witnessing a society becoming increasingly digital, and the pandemic accelerated this trend with the closure of bank branches and more transactions on mobile apps and online services. 

A digital Central Bank euro would ensure that we maintain a public complement to private digital means of payment. 

It could, for example, address some of the shortcomings in current options, like enabling offline payments – serving people without access to the internet or in remote areas. 

It could be an open solution, unlike many private options that often rely on both sender and receiver using the same closed interface. 

It could also be useful for payment providers, especially national providers that want to expand into other countries – which is essential because we want public and private solutions to coexist. 

We have to carefully consider the possible design: privacy and data protection are vital, but we also need to consider how we fight financial crime. 

Commercial banks are wondering about the impact it would have on them – the investigative work of the European Central Bank is pointing to a digital euro primarily to be used as a means of payment, not a store of value – so it doesn’t create an incentive to move deposits away from commercial banks. 

We’re also considering questions around who would distribute a digital euro, the costs involved and ensuring easy access to it. 

The key point is that a digital euro would have to provide real added value. And – again – we would also make sure that people can access and use physical cash. There is a need for a public discussion about a potential digital euro, and our pending legislative proposal will allow for that discussion.

What are the European Commission’s priorities on sustainable finance and how does the EU plan to finance the transition to a more sustainable economy?

The ambition of the European Green Deal is high: Europe should become the first climate-neutral continent by 2050. 

The cost of the transition cannot be funded by the public purse alone; we need every part of the economy and the financial system to play its part. 

Overall, when it comes to sustainable finance, we are thinking both about how the financial sector is resilient against climate risks, and the contribution it can make to the transition. 

The EU sustainable finance agenda is about transparency, so we have a number of tools relating to disclosure. Companies will disclose their transition plans, helping to refocus and track their efforts towards sustainability. 

The key to becoming a more sustainable economy is to invest in the transition. 
Our work on Capital Markets Union is important in providing the necessary private financing of the transition and allowing citizens to become more involved in capital markets, putting their money towards this more sustainable future.