We should create an electronic euro

Four years ago, European Union finance ministers rejected a call by the European parliament for the introduction of an electronic euro (the e-euro) as part of the preparation for the single currency . The UK now has an opportunity to re-examine the topic. It could, perhaps, become the ultimate Blairite project: creating the first national currency for the 21st century.

When Singapore announced it would be giving up on boring paper and metal money and making electronic money legal tender (in 2008), it was a significant milestone on the road to new money for the new millennium. The Singaporean public, despite the estimated $400m it will cost to make the change, are 85% in favour of the move. One reason is because it is expected to make the economy more efficient.

We don't think much about the cost of money: because the cost of notes and coins is spread so thinly, we assume it to be free. But someone, somewhere is paying for the printing presses at the Bank of England, armoured cars transporting sacks of cash from supermarket to bank, and thugs raiding building society branches with shotguns. In a world of smart cards, mobile phones and the internet it's no wonder people are beginning to think about the impact of new technology.

If the government does decide to join euroland, then it should rise to the challenge to make the UK the home of the "hard e-euro": the euro that exists in electronic form only but is legal tender for certain transactions. Think about it. Why did the common European currency have to be a single currency? It would have been perfectly reasonable to allow people to choose the currency most appropriate to specific transactions. The UK (and Denmark and Sweden) will, effectively, be in this position for the foreseeable future: a European traveller might use euros in Oxford Street and I might use sterling: since we're both using our debit cards, what does it matter?

The government doesn't need to mandate a specific technology for electronic money because it can leave that to the market. Make the euro legal tender for the payment of taxes and leave it at that: let people keep bank accounts in euros, let them store euros on their smart cards and email euros to each other using PayPal. There's no need for the hard euro to physically exist at all. Throughout Europe, the banks have already decided to replace all of their credit and debit cards with "smart" cards (cards with a computer chip on them, as they have all been in France for over a decade). As phonecards, as pay television cards, inside digital mobile phones, and in many other applications, these smart cards are becoming ubiquitous and consumers seem happy with them. No wonder that some two billion will be in use in Europe shortly, at the end of the euro transition period, during which the euro and national currencies will be in parallel circulation.

If almost everyone will have smart cards, why bother with paper and metal? It isn't just about cash cost savings: the issuing of an e-euro would have additional benefits, including the issuers of electronic money having more incentive to work towards interoperability and cross-border acceptance which would hopefully mean that consumers would be able to use their cards throughout the EU (whether in retail shops or on the net), thus stimulating trade. As it has turned out, this aspect of the euro transition was an abject failure: the electronic purse (a smart card that stores digital money) has been a bit of a flop. Consumers in Holland can use Ger man notes and coins to pay in shops in Spain, but they can't use the German electronic purse (Geldkarte, of which there are 60m+ in circulation) or the Dutch electronic purse.

Consumers, on the whole, do seem to be expecting such a change. A Gallup poll found that almost two-thirds of the UK population thought notes and coins would vanish in the future and almost half of those interviewed thought physical cash would disappear within a decade. One might even say if there are sections of the population who want to continue to use notes and coins, then they should pay for them: but that's for another day.

In the long term, the world of smart cards and digital money might develop in interesting ways. The technological platform used for the e-euro may have wider consequences because just as the smart cards (or whatever) reduce the cost to the Central Bank of creating currency, they would similarly reduce the cost to anyone else of creating currency.

While politics and economics are not the subject of this article, it is worth noting that one of the common objections to the euro is that it is not easy to operate monetary policy on averages across a currency area. It is difficult enough running a country like the UK under a single currency, even though it has relatively well-integrated regions. How do you set inter est rates: according to conditions in Reading or in Runcorn? Why not allow regions to issue their own money and set their own monetary policy? Once consumers have their smart cards, the cost of creating "Wessex shillings" or "Yorkshire brass" is trivial.

I haven't any figures to hand, but I would have thought that the overwhelming majority of personal transactions are local. Therefore, as a consumer I'd have to consider the long term value of "Surrey snobs" in relation to paying for my mortgage or buying a car, but I wouldn't have to calculate exchange rates in my head every time I park the car at Woking station because the prices there would be quoted in Snobs.

Why would regions bother to do this? Well, as Sir Richard Body MP has pointed out, this represents a democratisation of currencies. What's more, allowing the regional exchange rates to float would be a much more efficient and effective tool for economic stimulation than regional aid. If the value of Merseyside "moptops" falls against snobs, then people living in Surrey would naturally spend on Merseyside. It may sound crazy, but the e-euro could be the lever to change the way money works across Europe.

· Dave Birch is a director of Consult Hyperion whose Digital Money Forum will be held in London April 10-11.