Unease over euro launch

Shanghai Star. 2001-07-05

"I don't think it will be as smooth for businesses as the banks are saying."--Iris Leuchte, Owner of a gift shop

FRANKFURT - For crucial euro zone consumption, the launch of euro notes and coins on January 1, 2002 could prove as much a storm in a teacup as the Y2K "millennium bug" which sparked global fears two years before.

Robberies may surge as trucks take the newly printed cash across the continent, police warn that money launderers are lining up to wash their dirty Deutschmarks, and the sudden change in price tags threatens to confuse ordinary shoppers.

But the changeover is unlikely to have more than a slight, short-term impact on consumer spending and as a result ought not to threaten the wider economy.

In fact, European officials are confidently predicting the net economic impact will be nil, just like the millennium bug scare about possible computer glitches in January last year.

Thierry Vissol, a euro changeover expert from the European Commission's consumer affairs department, said if governments and organizations are effective in giving the public practical information on the switch, its impact will be tiny.

"The very big difference with the millennium bug was that nobody knew what was going to happen. With the euro, everybody knows what's going to happen and it is only a question of understanding," he said.

Vissol said consumers might boost spending in December as a precaution if they feared problems with the launch, causing a dip after the start of the year that might be reinforced by the planned delay of traditional January sales in some places.

Taking a longer-term view between September 2001 and March 2002, the effect should not be significant, he said.

Central bank officials have been trying in recent weeks to debunk scare stories of cash shortages or long queues to exchange old currency for euros at the start of next year.

Bundesbank President Ernst Welteke said recently that euro cash shortages were unimaginable and that the media was needlessly stirring public concern.

"The average person will not need to change money. You spend the marks you have as normal from the start of the year and the next time you go to the cash machine you'll get euros," he said.

Extra work

But many retailers are worried about confusion in the early days of the euro - the public will not touch the notes until January 1 - despite a Europe-wide information campaign describing the cash and its security features due to start in September.

Iris Leuchte, who runs a store selling coffee, gift products and lottery tickets in Frankfurt, said she was concerned that the cash launch would create a lot of extra work in re-labelling all prices to euro but also would slow business down.

"Sixty per cent of my customers are over 60 years old and all of my business is done in cash. I will have to explain to them about the euro even though there isn't much time at our busy cash till," she said.

She was also concerned about training her two staff and one part-timer how to recognize the 96 different euro coins that will be legal tender throughout the 12 euro zone nations.

Leuchte said she would aim to give change only in euro from day one but feared long lines at banks for businesses trying to pick up their starter kits of euro cash on Wednesday, January 2, the first business day of 2002.

"I don't think it will be as smooth for businesses as the banks are saying," she said.

National governments are aware that retailers face big challenges in familiarizing their own employees with the new currency.

Belgium has already announced it is delaying the start of New Year's sales until mid-January and other countries may follow suit, said the EU's Vissol.

"Many countries may do that. A lot of shopkeepers will be afraid that consumers will be too cautious or they will be afraid to have to cope with sales at the same time as trying to understand the new prices and money," Vissol added.

The delay will largely invalidate direct comparisons of retail sales figures between January 2002 and January 2001.

Price hike pretext

Dominique Forest, economic adviser to the EU consumer advocate group BEUC in Brussels, said he was concerned about retailers' use of psychological or "line" prices, such as 2.99.

Retailers and manufacturers are working feverishly to re-price and reposition goods for the euro launch, taking a loss on some goods by rounding down to the next lowest line price and trying to make up for it by raising prices on other goods.

"Most retailers would tend to round up rather than down to get to the psychological prices in euro," Forest said, adding that retailers are in any case free to set prices as they wish.

"If consumers think prices will be rounded upwards, it will be very difficult to prove that they are wrong," he added.

European Central Bank President Wim Duisenberg has expressed concern that the arrival of euro cash may used as an excuse for price hikes and called on consumers to be vigilant.

Forest said pricing in sectors where competition is scarce was a particular concern, such as at small shops in local communities. Old people with limited ability to compare prices may be particularly vulnerable, he said.

"If you are in a situation where you are not used to this new currency, the euro, you might tend to spend less at the beginning because you need to get used to the new financial environment, to find out how much the euro is worth and get used to the new reference prices in euro."

"That might have a negative impact on consumer spending."

Wide scepticism

For every euro enthusiast lining up at a cash machine at midnight on December 31 to be the among the first to receive, and spend, the single currency, there may be another hoping to avoid the new unit for as long as possible.

European consumer surveys continue to show the public remains sceptical about the new currency, but forecasts about their spending behaviour in the new year remain speculative.

The EU's Vissol, who has written a number of books on currency union and has been a key player in the EU's psycho-sociology group on the euro launch, said there were two main psychological behaviours towards money: one focuses on income, the other on spending.

"In general, half of the population will look at what happened to their income, the other half will look at the euro's impact on prices," he said.

In most euro zone countries, people will divide their national currencies by the conversion rate to obtain euro, so the face value of prices, but also salaries and wages, would decline.

Ireland is the only euro zone country where the face value in euro will appear to rise.

The income-oriented people will have the tendency to think that their revenue has decreased, so they will be more cautious in spending, Vissol said. The other half will look at prices and think that prices are going down, so they will have a tendency to spend more.

"If there were equilibrium in income between the two groups, the macroeconomic effect would be nil, but we don't know how income is divided among them," Vissol said.

"We don't know if the effect will be bigger on those who will be cautious or on those who will be spending. On average, you could say that the effects cancel each other out."

(Agencies via Xinhua)

http://www.chinadaily.com.cn/star/2001/0705/cn8-1.html

-- Martin Thompson (mthom1927@aol.com), July 05, 2001

Answers

If anything, shouldn't this strengthen the Euro? A coin in hand is worth two in the bush.

Oh, gosh, what did I say? I wasn't listening. Anyway, I hope the essence of my idea comes through this dense fog.

-- QMan (qman@c-zone.net), July 05, 2001.