Restructuring Europe's Monetary and Financial Architecture in a Fragmenting World Order

Most analyses of central bank digital currencies (CBDCs) focus on how to integrate them into existing bank-based architectures alongside bank deposits and cash. This paper takes a different perspective and explores how digital public money could be introduced and developed in Europe to reshape the underlying monetary and financial architecture gradually. That way, public money could, over time, become the dominant settlement asset for households and firms, and financial intermediation presently dominated by public-private banks gradually moves towards transparent competitive market processes. The motivation for adopting this perspective and the focus on Europe is threefold: the current architecture has structural weaknesses; digital technologies and especially tokenisation offer new possibilities; and increasing geopolitical tensions increase the need and opportunities for an independent, robust and effective European monetary and financial infrastructure. A four-phase transition to a public money system and privatised financial intermediation is proposed, with each phase designed to be valuable on its own terms while also enabling the next. In the long run, the envisaged architecture aims to deliver a safe monetary core, full competition in payments and financial intermediation, a simpler and more robust regulatory framework, more direct and transparent monetary policy instruments, and the alignment of the institutional architecture with principles of a competitive social market economy.