The European Union’s Mission to Transform Payments


The euro. Photo: ECB

Ripple Labs co-founder and CEO Chris Larsen is speaking in Amsterdam today at the EBAday Payments Conference and Exhibition.

For the world’s largest economy by GDP, the final challenge toward unification was always going to be figuring out how to allow money to move freely between European nations.

The concept of a unified Europe began over half a century ago after the devastation of World War II when the Treaty of Rome officially established the European Economic Community (TEEC). Economic integration, on the one hand, could provide a platform for stability and peace. On the other, it would ensure long term prosperity by allowing Europe to become greater than the sum of its parts.

The subsequent strategy to enable unification was fundamentally straightforward—freer trade between countries would be catalyzed by policies facilitating the free movement of not only people but also capital.

The euro is born

The Schengen Agreement, signed in 1985, paved the way for the first half of the equation by opening borders and abolishing passport controls between member states.

The European Union would then be formally established in 1992 with the signing of the Maastricht Treaty—which would lay out blueprint for the creation of a single European currency, the euro. EU members that qualified and and were willing to abandon their sovereign currencies would become what is known as the Eurozone.

In other words, the euro primarily exists as a solution to cross-border payments. The European Commision makes this point crystal clear:

Before the euro, the need to exchange currencies meant extra costs, risks and a lack of transparency in cross-border transactions. With the single currency, doing business in the euro area is more cost-effective and less risky.


Not only can companies sell into a much larger ‘home market’, but they can also find new suppliers offering better services or lower costs – a development that is helped by the growth of e-commerce over the internet. Trade within the euro area is estimated to have increased between 4% and 10% since the introduction of the single currency.

For the EU, the answer to cross-border payments was monetary standardization across the continent. As we know, standardization is a powerful platform for commerce and innovation. While Europe’s payment systems had historically been thought to lag the US in technological development, the region has made significant steps forward in the last 15 years since the euro’s introduction.

A year after physical euro banknotes and coins were issued in 2002, the first pan European Automated Clearing House (PE-ACH) went live for domestic payments. The Single Euro Payments Area (SEPA) was developed in 2008 to improve efficiency and help connected fragmented national markets. By 2010, SEPA was the dominant medium for electronic payments and as of 2014, is operational in all Eurozone countries. Now, the European Banking Authority (EBA) is focused on instant settlement for domestic payments.

An imperfect answer

But even as steady progress has been made, a unified currency was never going to be the perfect panacea.

For starters, real-time payments across borders remain problematic. Complicating matters is the opt-in nature of the Eurozone program. While some EU members have yet to qualify for the euro’s stringent fiscal requirements, others—such as the UK and Denmark—have chosen to keep their sovereign currencies.

As such, businesses and financial institutions still essentially rely on correspondent banks—whereby the consideration of foreign exchange adds cost—making low value payments uneconomical—and the use of multiple payment rails creates delays.

Then there’s the unintended consequences of the euro’s very existence. With a single currency, EU members are held economically responsible for their weakest link. This reality has been sorely tested since the financial crisis of 2008 given Greece’s inability to pay off its euro-denominated debt. Lacking the political and cultural homogeneity of the US, the EU has struggled—to say the least—in forming a sustainable plan forward that pleases all parties.

What if there was another way?

As Andrew Owens, a senior vice president at SunGard Financial Systems, wondered—did the creation of the euro “solve a payments problem that no longer exists?” He continues:

Before the introduction of the Euro, different currencies caused significant challenges for cross-border trade. The answer to this was to create a single currency and then a single payments scheme to bring harmonisation across the Eurozone and the end of cross border transactions within the SEPA zone. But as we enter 2015, we could arguably achieve the same and more with these emerging technologies. It could have given us that single settlement mechanism and furthermore, instant settlement at very low cost. Yes, we would all still have our own currencies and so FX would still be required. But, not only have there been strong arguments since 2008 that maintaining individual currencies may not have been a bad thing (you can’t have currency union without fiscal union)…

Owens presents a compelling thought exercise: “I can’t help but wonder whether we would have made the same decisions if the technologies we see emerging today, had been around at the turn of the century.”

Could Owens be on to something? Take, for instance, the nations of Southeast Asia—which have formed their own economic union—which some believe could surpass the EU’s economy in as little as a decade. Known as ASEAN—the member nations are committed to payments integration but only if they can avoid the potential headaches and curveballs of a single currency. Is it possible that their confidence in an alternative solution is informed by recent technological advances?

None of which, by the way, is a criticism of the EU’s chosen path—one that will inevitably reap rewards in spite of a few hiccups. Europe will learn from recent events and continue to develop smarter and more robust policies and structures necessary to support a successful single currency. Moreover, there’s much to be said about having a global currency backed by the world’s largest economy.

If anything, such divergent visions only further prove the pertinence of cross-border and instant payments in an increasingly globalized economy. The big question, of course, then becomes, How do we get there?

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