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Costs and Benefits of the Euro


Euro graphic
Unfamiliarity with euro notes and coins means that confusion and delays in transactions are inevitable

As the launch of euro notes and coins gets underway, the BBC's Dharshini David considers what the switch could mean for the 12 economies concerned.

It is the largest currency changeover ever made. The introduction of the euro will require the exchange of 15 billion notes - enough to stretch to the moon five times - and 50 billion coins.

Central Bank floors are being strengthened to cope with the weight of the cash, and distribution of the currency will require the help of police forces and border guards.

But the introduction of the euro notes and coins is not just a huge logistical challenge. It is also likely to have a sharp, if short-lived impact on the economy. Most marked will be the effect on consumer spending, inflation and businesses.

On January 1st or E-day, the euro became legal tender. Consumers and businesses have less than two months from then to convert their cash from their existing currencies. The short timetable, and an unfamiliarity with euro notes and coins means that confusion and delays in transactions are inevitable.

Retail woes

In shops, retailers have to to use two tills to deal with both their national currency and euros. Euro commerce, the European retail organisation has estimated that if each transaction takes just 20 seconds longer than usual, retail turnover could fall by over 10%.

European Central Bank, Frankfurt, Germany

Wage change crucial for ECB when trying to keep inflation low

As queues and disruption grow, consumers could defer purchases, further hitting sales. That would depress spending in the euroland economies temporarily, although the size of the impact is uncertain. At a time when Germany in particular is showing signs of weakening anyway, this would be far from welcome.

Of course, in an attempt to avoid delays and frustrations, consumers may bring forward purchases to the period just ahead of the New Year - causing a temporary blip in spending over and above the normal Christmas rush.

There is also a case for thinking that spending may be boosted in the run-up to E-day, if people try to dispose of cash in the "old" euro currencies earned in the informal, or black economy.

Anecdotal evidence suggests the value of the liras and francs being removed from under the bed may exceed 100 billion euros. But whatever the impact is on spending, it is likely to be short-lived.

Rip-off pricing fears

Dual pricing, of goods and services, in euros and the national European currencies has existed for some time.

But, bearing in mind that the euro tends to be fixed at very precise rates, such as 1 euro = 6.55957 French francs, it is not easy to mentally calculate what prices should be in euros. And the answer won't be a simple round number.

The fear is that retailers will therefore take the opportunity to "round up" prices on E-day. There is some evidence that some firms have already hiked prices for this reason in anticipation, to avoid being seen to do so on E-day.

But concerns over rising prices may be overdone. Many experts have pointed out that when the UK switched to a decimal system 30 years ago, a similar exercise to the euro changeover, there was little impact on prices.

Nevertheless, Grant Lewis, European Economist for Daiwa Securities points out that even if people believe prices have risen, it could be damaging.

"Even the perception that consumers have lost purchasing power as a result of the changeover will result in unions pushing for generous pay increases."

And if wages rise faster, there is a risk that inflation could subsequently rise.

Costs for business

For the ECB, charged with setting interest rates to keep inflation low, the impact on prices and wages is crucial.

Inflation is already above its target. But with growth weakening, further interest rate cuts may be needed. However, if inflation rises further, the Bank's ability to deliver rate cuts could be impeded.

It is not just consumers but also businesses who could find the switch to the euro disruptive. Small and medium sized firms in particular are widely unprepared for the event, according to research from the EU Commission. This could cause problems in areas such as the payment of staff, and purchase of goods and services.

Of course, one factor that shouldn't be forgotten is the cost of the actual changeover. This includes public awareness campaigns, changing payment systems, converting and replacing cash machines and producing notes and coins.

Such costs are difficult to estimate, but a study from economists at BNP Paribas suggests, "a total estimated cost for the changeover in the eurozone around 160-180 billion euros (100bn-130bn) - almost twice the size of the Irish economy." Most of this is likely to fall on the private sector.

It is difficult to estimate exactly what impact the switch to the euro will have on member economies, but it is likely to have implications for all - consumers, businesses and governments alike.

Adapted from bbc.co.uk: 2.1.02



E-mail Steve Margetts