The Euro:  Expectations and Experiences,

 an Early Assessment

 

 

 

 

 

 

Summer Research Report

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lucie Cerna ‘03

 

University of Puget Sound

Tacoma, Washington

 

 

August 2002

Table of Contents

 

 

 

1.      Introduction........................................................................................3

1.1.1.      History of Economic Monetary Union (EMU)……………………     3

1.1.2.      Three Stages of EMU……………………………………………..  3

1.1.3.      Admission Criteria of Member Countries………………………...     3

1.1.4.      Member Countries………………………………………………...  4

1.1.5.      Preparation of € day………………………………………………  4

1.1.6.      Name and Symbol………………………………………………… 4

1.1.7.      Winners and Losers……………………………………………….  4

1.1.8.      Advantages of the Euro…………………………………………...   5

1.1.9.      Disadvantages…………………………………………………….   6

1.1.10.  Euro/ Dollar Exchange Rate………………………………………   6

2.      European Central Bank……………………………………………...7

3.      Banknotes and Coins………………………………………………... 8

4.      Country Specific Experiences……………………………………….  9

4.1.   GERMANY……………………………………………………………… 9

4.1.1.  The Crisis of the Bookstores……………………………….   ………12

4.2.   FRANCE………………………………………………………………… 13

4.3.   SPAIN…………………………………………………………………….14

4.4.   GREAT BRITAIN……………………………………………………….. 15

5.      Conclusion…………………………………………………………… 17

6.      Works Cited…………………………………………………………..            18

7.      Timetable…………………………………………………………….. 20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Introduction:

As a summer 2002 C. A. Johnson Endeavor Foundation Scholar of the University of Puget Sound, I received the opportunity to research on a topic of my interest:  the euro or the single currency, introduced on January 1, 2002 in twelve European countries.  I was able to compare the experiences in Germany, France, and Spain and find out about the prospects of Great Britain adopting the euro in the future.  My research combined written publications and interviews with European citizens and is analyzed in the following report.  All interviews and articles are translated into English to facilitate reading. 

 

History of Economic Monetary Union (EMU):

The introduction of the euro on January 1, 2002 among twelve of the fifteen European Union members happened after 50 years of rapprochement in Europe, beginning with the wish of Germany and France to avoid another war between these two neighbors.  Several treaties followed and the created communities were expanded by more and more members.

 

1) The Treaty establishing the European Coal and Steel Community (ECSC), which was signed on April 18, 1951 in Paris, entered into force on July 23, 1952, and ended on July 23, 2002.

2) The Treaty establishing the European Economic Community (EEC); Rome on March 25, 1957, and entered into force on January 1, 1958. Known as “Treaty of Rome”.

3) The Single European Act (SEA), signed in Luxembourg and The Hague, and entered into force on July 1, 1987, provided for the adaptations required for the achievement of the Internal Market.

4) The Treaty on European Union, which was signed in Maastricht on February 7, 1992, and entered into force on November 1, 1993, created the political Union amongst the Member States and brought about considerable changes to the existing Treaties. The treaty created the European Union and decided on the adoption of a single currency among member states.

5) The Treaty of Amsterdam, signed on October 2, 1997, entered into force on May 1, 1999: it amended and renumbered the EU and EC Treaties.

                                                                                                         

Three Stages of Economic and Monetary Union:

The EMU was gradually prepared for the single currency to ensure a smooth transition.

1)  July 1990- December 1993:

2)  Start January 1994:

3)  Start January 1999:

 

Admission Criteria of Member Countries:

To ensure the stability of the euro, all member countries had to pass certain criteria before they could be admitted. Greece was the last one admitted to the euro zone in 2001.

The criteria included:

 

 

 

Member Countries:

These include 12 of the 15 European Union members:

Austria, Belgium, Finland, Germany, France, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.  Great Britain, Denmark, and Sweden decided not to adopt the single currency in the first stage.

The euro is also the legal currency in Monaco, San Marino, the Vatican, and the French overseas departments (Guyana, Guadeloupe, Martinique, and Rιunion) and territories (Mayotte and St-Pierre-et-Miquelon). 

 

Preparation of  €-day:

The preparation for the January 1, 2002 launch of euro banknotes and coins in all 12 countries began on January 1, 1999 with the adoption of the euro in the finance sector, as well as double pricing on bank accounts and price tags to gradually introduce the euro to the public in the transition period.  Finally in 2001, Greece adopted the euro as its currency after it had met the admission criteria. The governments of all the euro countries launched an information campaign with TV ads, newspaper and magazine articles, and brochures.  Starter Kits with euro coins were sold around mid December 2001 to prepare citizens for €-day (Jan 1, 2002), when banknotes were finally available in ATM machines and shops.  Businesses were required to pay for the euro conversion on their own since governments expected an increase in their profits.  They had to have double pricing on tags, train their employees for the euro launch, update their software, and purchase new cash registers.

In most countries between January 1 and February 28, 2002, two currencies were in circulation and businesses were required to accept euro and national currency, although the majority of people only used euros after about two weeks.  Since March 1, 2002, the euro is the only legal currency in all 12 countries.

 

Name and Symbol:

In 1995, the name Euro was adopted instead of Ecu, which resembled too much the former French currency.  In addition, Germans did not want a currency that sounded like “die Kuh” (cow).  € was chosen as a symbol for Europe, while = stands for stability.  It was taken from the Greek epsilon and stands for the cradle of European civilization. 

 

Winners and Losers:

As in every aspect of life, the euro also creates winners and losers. Winners are multinational companies, which save money on exchange fees for exports and take advantage of price transparency.  Consumers can benefit from competitive pressures on businesses, which will be forced to decrease prices.  Tourists will not have to pay exchange fees again for changing money and will be able to compare prices across the euro countries.  Businesses and industries producing paper, software, cash registers or vending machines also profited from the euro conversion because everything had to be changed and updated.  State authorities from the member countries have gained transparency to compare wages and tax contributions of citizens.

Small and medium sized companies are on the losing side since they are mostly national companies and thus do not save money on exchange costs for exports.  In addition, these companies had to invest a lot of money into the conversion and adaptation to the euro, but cannot take advantage of price transparency.  Banks are on the losing side because they lose a lot of money by the omission of exchange fees, but paid a considerable sum for the euro conversion.  Governments of euro countries (or the citizens as taxpayers) also had to finance the conversion themselves and spent millions of euros. 

 

 

 

 

Advantages of the Euro:

Besides increasing the political cooperation in Europe, the euro brings several many economic advantages.

Businesses:

Consumers:

Travelers:

 

One of the main advantages is the possibility for exact comparison of prices of products in different euro countries.  I compared 15 articles (same quantities) in Germany, France, and Spain and discovered that both Spain and Germany had seven products, which were the least expensive of all three countries.  Only stamps in France were less expensive than in the other two countries.  Price transparency was definitely a benefit of the euro, even though it was unlikely that people would travel to Spain for example, just to buy some tomatoes.  But it was nice to know that jeans were less expensive in Spain than in Germany and could be purchased during a vacation. 

Price differences across the euro zone are due to differences in value-added taxes, wages, rents, transportation connections, and national preferences.  From the 12 countries, Germany and Austria have the highest car prices, whereas Spain, Greece, and Finland have the lowest (FAZ).  The European Commission has decided that in 2005, prices for cars and spare parts will have to be the same across the euro zone, creating an advantage for consumers. However, prices of other products will probably stay different, as I noticed while comparing same articles in supermarkets (Monoprix in France, Champion in Spain, and Toom-Markt in Germany) and other stores. 

 

 

France

Spain

Germany

Tomatoes

2.12

1.50

1.29

Onions

1.51

1.10

1.29

Salad

0.75

0.80

0.33

Carrots

1.20

1.25

0.99

Potatoes

2.58

1.85

1.99

Apples

2.73

1.38

1.99

Bananas

1.89

1.70

1.39

Milk

1.14

0.58

0.55

Butter

1.15

1.38

0.66

Eggs

1.28

0.52

0.79

Bread

0.90

0.51

0.76

CD- Joe Cocker

18.30

16.95

15.99

Stamp

0.46

0.50

0.51

Vogue

4.50

3.00

5.00

Movie Theater

6.50

5.00

5.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comparisons made across the euro zone also show price differences.  A can of coke is cheapest in Luxembourg with €0.32 and the most expensive in Finland with €1.20.  Consumers can save money in Germany when buying 16 oz of beer (€0.58), but rather drink something else in Finland (€2.79).  A Mars chocolate bar is cheapest in the Netherlands (€0.34) and the most expensive in Italy (€0.82).  However, Italy is the cheapest for a pair of Levis 501 (€ 53.37), whereas Belgium is the most expensive (€74.29).  Greece is the cheapest for Channel perfume (€66.31), one Big Mac (€2.15), and one liter of gas (€0.68).  These products should not be bought in Finland (€106.30), Luxembourg (€3.10), or the Netherlands (€1.13), respectively (Bild der Frau).

These price differences are an advantage for consumers in all countries because they can compare prices and thus buy cheaper products during vacation or can order larger products online.  Nevertheless, the euro also has disadvantages and its rate depends on the fluctuations of the US dollar.

 

Disadvantages:

 

Euro/ Dollar Exchange Rate:

One of the main expectations of the euro was also the competition with the US dollar.  The euro zone combines a market of 300 million potential consumers and thus provides the opportunity for investment and trade.  However, the value of the euro fell from $ 1.16675 on January 1, 1999 to

$ 0.8230 in the fall of 2000. 

The euro started to regain strength in the summer of 2002 due to the US account deficit and several scandals on Wall Street.  The single currency finally attained parity with the US dollar on July 15, 2002 and managed to stay around this value over the summer.  Investors were losing faith in the dollar and this helped the euro to gain strength.  Or was the black market theory right? 

As professor Schmalen from the University of Passau, Germany, explained:  “About 40% of DM was used in other countries than Germany.  Because of its stability, the DM was an official currency in some parts of the Balkans (such as Kosovo and Montenegro).  When the date of the euro conversion was coming closer, the mafia changed all their DM in dollars to save its money.  That is why the dollar was getting so strong. However, after the euro introduction, the mafia started changing the dollars into euros, which would be more practical in the end.  Since large amounts of dollars were changed, the euro gained its strength.”  But will the euro continue to be strong or will the dollar overtake its competitor?

 

Graph:  October 2001- July 2002                                 Blue line: exchange rate

                                                                                     Green line: average rate

 

 

Advantages and disadvantages are associated with a strong euro. The advantages are low inflation, omission of changes in the interest rate by the ECB, increase in internal demand in the EU, and decrease in prices of raw materials (Sandri).  In addition, consumers and investors gain faith in the single currency. However, there are also disadvantages created by a strong euro:  a more competitive dollar, more expensive EU exports, and less growth of the European GDP (Sandri). 

 

European Central Bank (ECB)

 

The ECB was constituted in 1998 and is located in Frankfurt, Germany.  Its objective is price stability and control of inflation in the euro area, following the model of the German Bundesbank (national central bank).  Inflation fell from 2% in May 2002 to 1.7% in June 2002 (ECB online).  The tasks of the ECB are defining and implementing monetary policy for the euro area and setting one interest rate for all countries.  In addition, the ECB conducts foreign exchange operations and holds and manages the official foreign reserves of the member states (ECB online).  Even though inflation fell to 1.7% in June, the ECB left the interest rate by 3.25% in July 2002.  It has not changed the rate since November 2001, but falling inflation might encourage the ECB to increase the interest rate.

  Especially one interest rate can lead to problems because all 12 countries have different economic systems, but have lost the ability to adapt their interest rate to a particular economic situation.  One interest rate that is appropriate for Germany can lead to problems in Ireland.  If an economy is in recession, the government lowers the interest rate to increase spending and investment, but it cannot do anything since it is locked in the Eurosystem mechanism. 

The Eurosystem consists of the 12 euro zone national banks and the ECB, while the European System of Central Banks (ESCB) is set up of the 12 euro zone national banks, and the national banks of Great Britain, Denmark, and Sweden.  However, these three national banks are not part of the governing council, which is the supreme decision-making body of the ECB.  They are only members of the general council, reporting on the progress of the countries that have not yet adopted the euro (Annual report). 

The executive board of the ECB consists of President Willem Duisenberg (Dutch), vice president Lucas Papademos (Greek) and four other members.  In a recent research conference, Mr. Duisenberg pointed to the limitations of international policy coordination, but nevertheless encouraged cooperation, such as between the ECB and the Federal Reserve.  The ECB not only targeted the exchange rate to maintain price stability, but also employed a “monetary policy strategy that focuses on the internal stability of the currency” (ECB online).

The ECB’s function is also to serve as an information source for the public.  I addressed the bank in March and again in July to ask for an interview, so I would be able to ask an employee several questions.  Even my email to president Duisenberg explaining my research and questions did not help me to get in closer contact with the ECB.  Not only was my wish for an interview repelled due to “scarce resources of the summer period”, but also none of the 1,100 employees took the time to answer my questions personally per email. I was politely referred to the website to search for answers to my questions.  In addition, my effort of several months to attend the International Research Forum on Monetary Policy proved unsuccessful few days before the conference, “due to the very high number of requests for participation”.  If I had been a professor or politician, the situation would probably have looked differently.  Interested students and general public are only advised to read publications online (http://www.ecb.de).

The ECB was responsible coordinating the distribution and implementation of euro banknotes and coins to banks and stores prior to January 2002 to ensure sufficient supply for € day.  The bank’s function was to facilitate a smooth cash change-over by informing citizens, businesses, and governments of the participating countries. 

 

 

 

 

 

 

 

 

 

Banknotes and Coins

 

The introduction of the euro meant that citizens of the 12 countries had to get used to new banknotes and coins.  The seven banknotes of the euro were designed by the Austrian artist Robert Kalina in 1996 and chosen from 44 artists by the European Monetary Institute (EMI) and the public.  They depict bridges, windows, and gateways not from certain countries, but from seven periods of architectural style.  Classical for the € 5, Romanesque for the € 10, Gothic for the € 20, Renaissance for the € 50, Baroque and Rococo for the € 100, the age of iron and glass architecture for the € 200, and modern 20th century architecture for the € 500 (ECB).  The banknotes have special safety features and are designed for blind people.  Each banknote has a different color and size to facilitate distinction. 

The banknotes contain the following names and motives:

·        name of the currency – euro – in both the Latin (EURO) and the Greek (EYPO) alphabets

·        initials of the European Central Bank in five linguistic variants – BCE, ECB, EZB, EKT and EKP – covering the 11 official languages of the European Community

·        flag of the European Union

 

By January 1, 2002, around 14.5 billion euro banknotes were printed for the 12 participating countries: 10 billion banknotes to replace national banknotes and 4.5 billion banknotes as stocks. These banknotes represented a value of about  € 600 billion (ECB).  The national banks of the member countries were responsible for the cost of printing new banknotes and coins.    Estimates are that the cost of printing was around € 1.23 milliards for Germany.  Large companies had to pay between € 25 and 100 million for the euro conversion, while retail trade was affected the most with a cost of about € 7.67 milliards (Baulig).

Germany, the country with the most inhabitants, produced 4,342 million banknotes, while the least populated country Luxembourg produced 46 million notes.  € 50 banknotes were produced in the largest quantity (3,674 million), closely followed by € 20 (3,608 million).  The production of

€ 200 banknotes was the smallest with 229 million. The old banknotes were shredded into bricks and used in thermal power-stations and cement factories.  If Germany piled all its old Deutsche Mark banknotes, it would create a stack of 194 miles and 3,086 tons. 

The eight euro coins have the map of the euro countries, together with the 12 stars of the European Union on the front side and national motives and symbols from each country on the back.  The common side was designed by the Belgian artist Luc Luycx.  The sovereign countries Monaco, San Marino, and the Vatican also decided to adopt the euro as their currency, and thus were allowed to have their own national sides of the coins.  Due to their rarity, these are in particular of great collector value.  Some countries have only one motive on all coins (Belgium, Ireland, Luxembourg, the Netherlands, and Vatican), some have three (Finland, France, Germany, Monaco, Portugal, and Spain) and some six different motives (Austria, Greece, Italy, and San Marino).  All coins can be used in any of the 12 member countries.

Germany has an oak twig on 1, 2, and 5 cent coins, which was already on the old Pfennig.  10, 20, and 50 cent have the Brandenburg Gate in Berlin, which is a symbol for the division of Germany in 1945 and then unification in 1990.  €1 and 2 have an eagle on their back, the symbol for German sovereignty. 

The French chose Marianne, their symbol of France, for 1, 2, and 5 cents and a sower, a constant symbol in history of French Franc, for 10, 20, and 50 cents.  A tree symbolizing life, growth, and continuity is on the back of  €1 and 2, together with the motto of the Republic: Libertι, Egalitι, Fraternitι. 

Spain has the cathedral of Santiago de Compostela (a pilgrimage destination) on their 1, 2, and 5 cents.  The famous author Miguel Cervantes decorates 10, 20, and 50 cents, while the current Spanish king Juan Carlos I de Bourbon was chosen for € 1 and 2.

Recent polls show that people consider the euro coins and banknotes easy to recognize and to handle, even though the banknotes are preferred by the majority of people.

Germany

 

Germany was well prepared for the euro and the transition went smooth.  However, the main problem ended up to be the “teuro” (from teuer, expensive).  The government relied on the self-obligation of businesses to convert prices exactly, but these saw the opportunity to increase prices because the conversion usually led to uneven prices.  Since they were not required to continue double pricing after February 2002, they had a free hand in adjusting their prices since customers could not compare prices exactly.  Even though Germany has an easier conversion rate than the other countries (€1= 1.95583 DM, rounded to 2).  People noticed that on some products, the DM was just changed with the € sign, an increase of 96%.  Due to the anger of teuro, Germans lost faith in the single currency, while about 54% wished the Deutsche Mark back in May 2002 (Kirk).  Every price increase was blamed on the euro, although bad harvests of fruit and vegetables were also partly responsible for some price increases.  Nevertheless, most of the times, businesses took the opportunity to receive more profit and usually had some excuses for the increase. Here are some common excuses (collected from Focus and Bild).

 

The government would like to calm down the population by pointing to the result of the statistical publication that inflation is only 1.7%.  However, people are persuaded prices increased more, especially groceries and restaurants.  Among the products compared, those for every-day-life are only a small percentage and thus overrun by expensive items, such as car or rent.  If those are left out, the inflation is at least 4.8% for daily products.  As Irena Cerna, housewife, pointed out:  “The money is disappearing much quicker with the euro.  Especially prices of groceries increased everywhere.  So I’m only buying what is necessary.”