Five years of the euro: “Teuro” or strong currency?

Table of contents

A. Introducing the euro
1. The introduction process
2. The Role of Information
3. Dual price displays

B. What the euro caused
1. Advantages through the new institutions
2. The single market
3. The international role
4. Benefits and costs of adopting the euro
4.1 The Scandinavian Countries
4.2 United Kingdom
4.3. Arguments of the Yes- and No-campaigns

C. An outlook to the future
1. More countries to come
2. Banknotes and coins in the future

D. Conclusion
1. Consumer prices
2. Inflation

Register of literature
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A. Introducing the euro

1. The introduction process

On 31 December 1998, the conversion rates between the euro and the currencies of the participating Member States were irrevocably fixed and on 1 January 1999 the euro was introduced as the single currency of eleven EU Member States. From that day on the Eurosystem took over responsibility for monetary policy in the new euro area. This was the beginning of a transitional period that was to last three years and end with the introduction of euro banknotes and coins and the withdrawal of national banknotes and coins. The first state that additionally joined the Eurosystem was Greece, as it fulfilled the necessary conditions for the adoption of the single currency and so followed on 1 January 2001.

The major event of introducing the single currency in 1999 did not have a great effect in daily life because the consumers in all twelve countries were still using their national banknotes and coins in payment transactions. Officially the euro replaced the national currencies, with the national currency units becoming sub-units of the euro but it existed only as scriptural or ‘book‘ money. That meant that first of all especially the world of business and finance began to use the euro in cashless operations. For them the transition happened immediately but on the other side for administrations and business the transition period took longer because they had to change their systems for accounting, pricing and payments over to the euro. To familiarise the people living in the euro-area-countries with the euro, dual pricing on labels was introduced and so the general public recognized the changing.

On 1 January 2002 “the greatest cash changeover in history took place”^[1]: Euro banknotes and coins were brought into circulation and the euro was used by more than 300 million residents in the euro area. “It was a challenge of unprecedented dimensions that involved the banking sector, cash-in-transit companies, retailers, the cash-operated machine industry, and the general public. Around EUR 144 billion in euro cash was provided early by the national central banks to banks (frontloading) and by these banks to retailers (sub-frontloading) to avoid bottlenecks in the supply chain. This meant that euro cash was widely available in all sectors in the first days of 2002. By 3 January 2002, 96 % of all automated teller machines (ATMs) in the euro area were dispensing euro banknotes. And already one week after the introduction, more than half of all cash transactions were being conducted in euro. The cash changeover was completed within two months. National banknotes and coins ceased to be legal tender by the end of February 2002 at the latest, and earlier in some Member States. By that time, more than 6 billion banknotes and close to 30 billion national coins had been withdrawn, and for over 300 million citizens in 12 countries the euro had finally arrived.”^[2]

To give some more figures, the people inside the euro-area “carr[ied] out about 300 billion retail payment transactions each year [and] more than 80 % … [was] paid in cash. Following a smooth and well-prepared changeover, the total outstanding value of banknotes has almost tripled (from euro 221 billon in January 2002 to euro 595 billion at the end of 2006), whereas for coins it has increased more moderately (from euro 13.0 billion on 1 January 2002 to euro 17.6 billion)”^[3]

illustration not visible in this excerpt^[4]

But not only countries that introduced the euro as their new currency were affected. The introduction also had an effect on the neighbouring countries, where for example the euro was used for payment transactions or saving purposes. And all over the world the euro was used in many tourist destinations. “Estimates from the European Central Bank (ECB) indicat[ed] that between 10 and 20 % of the total value of euro banknotes in circulation [was] … held outside the euro area.”^[5], which is an immense amount.

So it can be said that the euro was really fast and had also been well accepted in all of the euro-area-countries. Especially when taking in account that a new set of banknotes and coins with a different denominational structure than the former legal currency had to be adjusted and a new scale of prices and values had to be set.

Another great role in accepting the euro played the supply with information about the new currency what I want to show in the following chapter.

2. The Role of Information

“According to survey information collected by the Commission there [was] still a lack of specific information about the euro in certain areas. In other areas, some misperceptions remained widespread. This point[ed] to the need for renewed efforts to inform the general public in the EU about the euro.”^[6] For example the advantages of the euro were not noticed by many euro-citizens. Many people still didn’t realize the fact that with the euro there were no extra cots or charges when withdrawing money, paying with bank card or executing a bank transfer with a bank card in another country of the euro area. In non-euro countries the need for information seemed to be even higher. For example many Member States would sooner or later enter the euro area and the majority of the people were still badly informed. This meant that these people were reluctant and fearsome about the introduction of the euro. An example therefore was the respondent misbelieve that the euro caused the prices to rise. This suggestion also had an effect on the euro-area-entrants shown by the fact that “an average of 45 % of respondents in the ten recently acceded Member States believe[ed] that the future introduction of the euro in their country will lead to higher inflation.”^[7] But this belief simply wasn’t true. On the contrary the annual inflations were really low since the introduction in 1999.

Beside the introduction itself and the offered information dual pricing was an instrument to introduce the euro to the public. That is the next point I am about to discuss next.

3. Dual price displays

As I already mentioned dual pricing was a popular instrument but it could also be counterproductive in terms of “thinking in euro”. Survey information showed a continuous development towards thinking in euro as for common day-to-day purchases, a clear majority (57 %) of the population in the euro area calculated in euro, whereas one in five still counted in the former national currency. For high-value exceptional purchases, such as a car or a house, it remained different. There more people still counted in the previous national currency (40 % on average) compared to just 29 % thinking in euro. Now that the euro was introduced 5 years ago the mental adoption should have been in higher progress as it remained nowadays. Therefore the dual display practise in the euro area should be discontinued. Of course they assisted consumers in the early stages of the changeover but they also allowed consumers to go on counting in their former national currency and delayed the mental changeover to the new scale of prices and values.

After the euro was introduced different changes were about to happen and some things had to be introduced. Therefore I want to talk about new institutions, the single market, the international role and the benefits and costs the euro had in the next part.

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^[1] European Commission: One currency for one Europe. The road to the euro. Page 10 (Luxembourg, Office for Official Publication of the European Communities, 2006)

^[2] Ebd. Page 10f

^[3] European Union: Five years of euro banknotes and coins. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006DC0862:EN:NOT (18.07.07 and other dates)

^[4] European Commission: One currency for one Europe. The road to the euro. Page 10 (Luxembourg, Office for Official Publication of the European Communities, 2006)

^[5] Ebd.

^[6] European Union: Five years of euro banknotes and coins. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006DC0862:EN:NOT (18.07.07 and other dates)

^[7] European Union: Five years of euro banknotes and coins. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006DC0862:EN:NOT (18.07.07 and other dates)