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| December 2001 |
Vol.4, No. 10
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Europe's New Money
The biggest currency experiment
in all history starts at the end of the year when the euro becomes the official common
currency of 12 European nations. But are the new bills and coins all that are being
exchanged?
by Paul Kieffer
Has there ever been anything like it? Imagine yourself in Germany or France at the
end of this year. On New Year's Eve you enjoy a quiet dinner in your favorite restaurant,
paying for your meal with German marks or French francs. When you take a taxi the
next day to attend the traditional New Year's concert played by your city's symphony
orchestra, the bills and coins you used the evening before are no longer the official
currency. Instead, you use one of the 12 billion new bills or a few of the 70 billion
new coins that will have become the new official currency overnight.
Beginning Jan. 1, 2002, more than 300 million people in Europe will begin the adjustment
to the new money in their wallets and purses. After three years of "existence"
as a book value currency, the euro is about to make its official debut as real money.
The opposition to the new currency, initially rather loud in countries like Germany
and the Netherlands, has given way to quiet and at times begrudging acceptance of
the euro's reality. That reality will soon be achieved by the culmination of the
unforgiving timetable set for the euro by the finance ministers of the 12 European
Union countries participating in the currency union.
According to that timetable determined three years ago, beginning
on Sept. 1 the national banks of euro countries began distributing the new euro bills
and coins to banks. Acting on their own responsibility, banks are now allowed to
provide businesses an advance supply of the new money. On Dec. 17 private citizens
will be able to purchase "starter kits" with euro bills and coins at their
local banks. The value of these "starter kits" is approximately $9 U.S.
in local currency and customers will be allowed to purchase as many as they want
as long as the supply lasts.
The architects of the euro transition realize that the new
money available via the "starter kits" will by no means suffice to pay
for all needed goods and services at the start of the new year. For that reason there
will be a transitional period lasting until Feb. 28, 2002. During this time both
the old currencies of the 12 euro countries and the euro itself may be used. However,
after Feb. 28 only the euro will be accepted as legal tender.
A logistical headache
At various times in any Western country, small parts of the money supply in hard
currency are being renewed. Old bills are replaced by new ones, and new coins are
minted to replace those that have become worn.
However, nothing has ever been done on a scale like the exchange
taking place in the next few weeks in Europe. If all the new bills printed in preparation
for the introduction of the euro were stacked up, they would be 55 times higher than
Mount Everest. Lined up end to end, they would cover four trips to the moon and back.
Germany is an example of the Olympic proportions of the task. It has 15.5 billion
new euro coins and 2.5 billion euro bills to distribute and the existing 29 billion
mark coins and 2.6 billion mark bills to remove from circulation.
The distribution of the new currency to banks has already started. At the same time
the normal exchange and transportation of German marks among banks continued via
armored vehicles. Planners realized early that the estimated 2,300 armored vehicles
used for transporting money in Germany would not suffice to distribute the euro on
time. Additional trucks and security personnel were hired to meet the unprecedented
need.
Some local banks in Germany had to reinforce their vault floors to stack the special
containers for new euro coins. The critical phase of the exchange-at the end of December
and in early January-will mean a lot of overtime for bank employees. Politicians,
employers and unions held special talks to achieve a one-time allowance to deviate
from the maximum of 53 work hours a week allowed for bank employees in the private
sector (60 hours for employees of government-owned banks). Seventy-hour workweeks
are expected to be the norm in early January.
Distributing Europe's new money is only half the challenge. The existing currencies
have to be collected too. Financial planners had originally predicted that half the
money now in circulation would be exchanged during the first two weeks of January.
To help alleviate the expected crunch, especially with old coins, Germany's Bundesbank
began an advertising campaign in May utilizing billboards and television commercials.
The ads appealed to people to break open their piggy banks and deposit coins in an
existing bank account. With their ads, Germany's bankers hoped to get an early exchange
on the approximately one third of German coinage estimated to be held in private
households as savings. The appeal is understandable when one realizes that the total
weight of German mark coins in circulation totals nearly 100,000 metric tons.
Part of the logistical headache involved in the euro's debut is the design of its
coins. Since each member country is allowed to place a national motif on the reverse
side of the coins it mints, there can be as many as 96 variations of the eight euro
denominations: 1, 2, 5, 10, 20 and 50 cents and the 1 and 2 euro coins. In addition,
San Marino and the Vatican are allowed to mint their own euro coins, which gives
the potential for a total of 112 different euro coins (currently there are 45 different
designs planned). And all of these coins will be legal tender anywhere in the euro
zone-a Greek 2-cent coin will be legal tender in the Republic of Ireland.
Printing the euro bills is by far the greater challenge. In an industry where tolerances
are measured in nanometers (a millionth of a millimeter) it is impossible to achieve
fully compatible banknotes when eight different paper suppliers and 12 different
printers are involved in printing the new bills. Each printer insisted on incorporating
his own anti-counterfeiting techniques. As a result, there will not be any uniform
recessed portrait on the front of the bills, which is common to nearly all bills
printed outside the Muslim countries. However, secret chemical substances and physical
coding are being used for the paper and colors in all euro bills.
What will change?
For most Europeans the initial change after Jan. 1 will be limited to getting used
to the new coins and bills. The treaty creating the currency union prohibits price
increases for existing contracts and products manufactured and priced in the old
currencies in the last months of their existence.
The exchange rate for each national currency being replaced by the euro is set to
the fifth decimal point. In converting to the euro, rounding up for decimal values
greater than 4 and rounding down for decimal values less than 5 is permitted. For
months prices in most businesses have been stated both in the national currency and
in euros. In many cases the currency conversion has resulted in unusual prices in
the national currency, but which are "even" figures in euros.
It remains to be seen which price levels will become the dominant ones in the euro.
Currently it is estimated that 77 percent of all food items in Germany are sold at
only 10 different prices ranging from 0.99 to 5.99 German marks. To obtain new prices
in euros ending in a 9, some adjustments will be required, which translates into
increased prices.
Of greater concern to many economists is the predicted leveling out of inflation
within the euro zone. It is considered unlikely that the lower inflation rates of
northern European countries will be "exported" to southern Europe. Instead,
the generally higher inflation in the south will gradually level out within the euro
area, resulting in a more uniform inflation rate, but one which would be traditionally
higher than what countries like Germany and the Netherlands have known in past years.
On the other hand, for the first time in the history of the European Union, citizens
of countries participating in the euro will be able to make quick, clear price comparisons
across national borders. It will no longer be necessary to exchange money when visiting
other euro countries, an advantage emphasized in television ads paid for by the German
government, whose citizens are known for their vacation travel to sunny southern
European countries like Italy and Spain. Observers predict that the convenience of
the new currency across national borders will help to dispel any remaining doubts
among Europeans about to embark on this ambitious monetary adventure.
The euro and national sovereignty
Much less noticeable than the highly visible exchange of banknotes
and coins at year's end will be the unavoidable final realignment of national sovereignty
resulting from the euro's introduction. Control over a national currency has always
been a vital element in any country's national sovereignty. National economic programs
and national bank monetary policy traditionally are intended to some extent to strengthen
or protect the national currency.
With the euro, however, monetary policy has been ceded to the European Central Bank
(ECB), which as a supra-governmental agency already determines key interest rates
and will set money supply levels for all 12 countries in the euro zone. The national
banks of those countries are in essence now mere vassals of the ECB, implementing
its policies on a national level.
The sovereignty issue is one of the reasons why some in those non-euro EU countries
like Britain are reluctant to join the monetary union. There is no question that
exchanging the British pound for the euro would mean a loss of monetary independence
for the United Kingdom.
On the other hand, the other key element influencing the value of national currency
remains in the hands of each national government: economic policies. Critics of the
euro have warned for several years that the euro may experience difficulty in becoming
a stable hard currency unless economic policy is coordinated among euro countries
in the same way that monetary policy is determined by the ECB.
If those critics are proven to be correct, then the remedy will hardly be a return
to individual national currencies. That would be a very expensive remedy. For example,
the cost of refitting 2.4 million coin-operated machines for the euro in Germany
alone has been pegged at $1 billion U.S. For German banks the conversion is estimated
to cost $2 billion U.S., and the total cost to the German national economy will likely
top $10 billion U.S.
If the critics are right, then the more likely scenario will be the establishment
of centrally coordinated economic policy for the euro zone. This, in turn, would
represent a further weakening of national sovereignty and require new political institutions
to determine such policies.
In short, the euro is not a "make or break" situation for Europe, but simply
a "make" situation! Once the euro is introduced, there will be no return
to national currencies without irreparable damage being done to the European Union.
The debut of a world currency
On Jan. 1, 2002, the euro will become the official common currency of 12 European
countries having a combined population of 302 million people: Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain.
In addition, the euro will become the official currency of several other countries
and territories administered by or with ties to EU countries: French Guyana, Guadaloupe,
Martinique, Mayotte, Monaco, Réunion, St.-Pierre-et-Miquelon, San Marino and
Vatican City. Three countries have unilaterally declared the euro to be legal tender
as of Jan. 1: Andorra, Kosovo and Montenegro.
The European Commission has approved bilateral agreements by France and Portugal
with former colonies whose own currencies will be convertible in unlimited quantities
at fixed rates of exchange with the euro: Benin, Burkina Faso, Cameroon, Cape Verde,
Central African Republic, Chad, Congo, Equatorial Guinea, Gabon, Guinea-Bissau, Ivory
Coast, Mali, Niger, Senegal and Togo.
Currently there are 13 European countries applying for membership in the European
Union. Those countries make up a large portion of eastern Europe. Several of them
have already announced their intention to seek membership in the European Monetary
Union, and all are expected to tie their national currencies closely to the value
of the euro.
Will history repeat itself?
For many Germans the euro will not be the first new currency they have experienced.
After three years of economic doldrums following the end of World War II, post-war
Germans awoke on Saturday, June 19, 1948, to read a special proclamation issued by
the military governments of the American, British and French zones (which later combined
to become the Federal Republic of Germany). The introduction of a new currency was
announced for the following day, June 20, 1948. It was to be called the "German
mark" and was to replace the "Reichsmark" of Hitler's Germany.
Initially every resident of western Germany was given 40 marks in cash, and the balance
of their "Reichsmark" holdings were later exchanged at a rate of 10 old
marks for one new "German mark." Looking back, the exchange rate seems
draconian, but the introduction of the new currency generated confidence and quickly
ended the hoarding and rationing of essential goods.
In retrospect the introduction of the postwar German mark is seen as the starting
gun for what came to be known as the German "Wirtschaftswunder"-nearly
15 years of unprecedented economic growth and full employment. The man widely credited
with being the architect of Germany's post-war currency reform was Ludwig Erhard,
who at the time was Director of Economics in the combined Western military zones.
In a radio address on June 21, 1948, Erhard issued an appeal that may well apply
to the euro as well: "I appeal to your good sense and your ability to recognize
things when I say to you that the new currency is in no danger of instability if
we will only provide orderly public financial planning and as well responsible monetary
and debt policies, to ensure that the production of goods is synchronized with purchasing
power. That isn't a matter of chance and doesn't require luck, but instead unswerving
willpower to act in accordance with the principles of an orderly currency."
The steady hand described by Erhard was first provided by the combined Allied military
government and later by Germany's own national government. With the euro, it is a
whole new ball game. If Ludwig Erhard's words apply today with the introduction of
another new currency, who or what will supply the steady hand needed to guide the
economic policies of the euro zone to monetary stability as a hard currency? Time
will tell. wnp
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