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Status of the Transition to Euro Banknotes and Coins
Morten Roed Sřrensen, International Relations
Introduction
The introduction of euro banknotes and coins in the euro area[1]
was a huge task that affected the everyday lives of more than 300
million cit-izens. Billions of euro banknotes and coins were ready to be
put into circulation on E-day, 1 January 2002. The size of this
operation can be illustrated by a couple of examples: laid out one after
the other, the banknotes would reach from the Earth to the moon and back
twice, and the total weight of the coins was more than 24 times that of
the Eiffel Tower. Within two months, from 1 January to 28 February 2002,
all these banknotes and coins replaced the national currencies of the
euro area member states as legal tender.[2]
It had thus become possible to use the same banknotes and coins in all
euro area member states (irrespect-ive of the different national sides
of the euro coins).
In spite of the relatively short dual circulation period, the
operation required several years' planning, involving large areas of
society. Legislation had to be in place, banknotes and coins
manufactured and distributed, information campaigns launched, etc. The
key position of the banking system in relation to payment systems
naturally meant that the banks were also a key player in connection with
the introduction of the euro. Companies had to switch to pricing and
submission of accounts in euro. Last, but not least, citizens had to get
accustomed to the new banknotes and coins when shopping, comparing
prices, etc.
The transition to euro banknotes and coins was a success,
particularly in view of the scale of the operation. Only few problems
arose, and the changeover was more rapid than expected. After only one
week the majority of transactions in the euro area were in euro. The
smooth transition was to a large extent attributable to a carefully
planned cash changeover and a positive attitude on the part of the
citizens. This art-icle looks into the cash changeover from the planning
stage to the actual introduction of euro banknotes and coins, as well as
various consequences of the changeover such as possible derived price
increases.
Preparation of the cash changeover
While the overall framework for the introduction of euro was planned
at the European level, the actual organisation and implementation took
place at the national level. Detailed national changeover plans were
prepared in all euro area member states, taking into account the
framework set up in e.g. the EU treaty. The basis was the introduction
of the euro on 1 January 1999, and that for the first three years the
single currency would only exist as account money. Euro banknotes and
coins were to be introduced on 1 January 2002, and replace the national
banknotes and coins after a maximum of two months. A few countries opted
for an even shorter dual currency period (France, Ireland and the
Netherlands).
In virtually all euro area member states a committee was set up to
handle the overall coordination of the cash changeover. In most cases
this committee was headed by a representative of the Ministry of
Finance, and the members came from a number of institutions and
organisations deemed to be important in the transition phase. A key task
for these committees was to ensure that the necessary preparations were
made by the responsible players, so that the changeover plan could be
duly implemented. The central banks played an important role in these
committees, particularly with regard to the preparations in the
financial sector and the actual cash changeover.
The decentralised approach to the preparations for the euro
changeover made it possible to adapt the process to the traditions of
the individual member states. For instance, the degree of coordination
varied – in some countries measures tended to be centrally
coordinated, while other countries to a larger extent left the
initiative to the individual institutions. Parallel with the national
information campaigns, the European Central Bank (ECB) and the European
Commission conducted cross-border campaigns.
The tasks related to the cash changeover were varied and extensive.
Parliaments had to adopt legislation giving all parties involved a firm
basis for their further planning. Banknotes and coins had to be
manufactured, and large public institutions such as tax authorities
needed time to implement projects to make their IT systems euro
compatible. On top of that, this coincided with other large IT projects
relating to the millennium rollover. Alongside these concrete tasks was
the overall coordinating role of ensuring and promoting timely euro
preparations on the part of other players, and spreading awareness of
the cash changeover among the general public.
The banks in the euro area were important for the transition to euro.
The introduction of the euro on 1 January 1999 had already presented a
major challenge to the banks, since the financial markets all at once
had to operate in euro instead of the 11 national currencies (Greece did
not adopt the euro until 1 January 2001). This transition was seamless.
In connection with the cash changeover the primary tasks during the
trans-ition period were to convert bank customers' accounts to euro
accounts and to start calculating non-cash payments, e.g. cheques, in
euro. Towards the end of 2001 the banks also faced a number of logistics
tasks relating to putting the euro into circulation at New Year, cf.
below.
The scale of the business enterprises' euro preparations varied
according to their size. For large, complex organisations, as for the
large public bodies, it was important to get the necessary euro projects
on track as soon as possible. Tasks included changing accounting
practices, re-denominating share capital and converting payrolls to
euro. For small and medium-sized enterprises the preparations were less
extensive, but they, too, had to adapt e.g. accounting practices and
payrolls to euro.
Information campaigns informing citizens of the introduction of euro
banknotes and coins were a prerequisite to a successful cash changeover.
Many resources were used to inform the public of the forthcoming
operation. The ECB, the European Commission and national public and
private institutions all conducted information campaigns via a wide
range of media. For instance, citizens were informed of the transition
to euro via brochures distributed to households, advertisements in
newspapers and magazines, and TV spots. A special effort was made to
reach weak groups, primarily the blind, weak-sighted and hearing
impaired, and people with learning disabilities. Meetings were arranged
for these groups during 2001, at which they could familiarise themselves
with specially manufactured non-negotiable euro banknotes and coins.
Were the euro area member states – with all their diverse and
necessary preparations – then ready for the cash changeover on 1
January 2002? In short, yes. Even though many banks and business
enterprises adapted their systems to euro at a relatively late stage. In
many member states most bank accounts were not converted to euro until
late in 2001, and in particular small and medium-sized enterprises'
(lack of) preparation gave cause for concern. However, with a large
effort towards the end of the year major transition problems were
avoided.
The euro-readiness of the general public was monitored regularly via
opinion polls. Again, it dawned upon people fairly late what was going
to happen at New Year 2001/02. One reason may be that people do not feel
any great need to seek information about something which lies relatively
far into the future. In addition, the information campaigns were
intensified towards the end of 2001. For instance, all euro area member
states sold euro coin sets to the public from mid-December, and in many
places they were soon sold out. The more widespread use of dual pricing,
i.e. pricing in both euro and the national currencies, towards the end
of 2001 undoubtedly also helped to raise awareness. At the start of 2002
three quarters of the population in the euro area member states felt
well prepared for the forthcoming cash changeover, but a major logistics
operation still awaited if it was to be a success.
The actual cash changeover
15 billion euro banknotes and 51 billion euro coins had been
manufactured and were ready to be put into circulation from 1 January
2002. Parallel with the introduction of euro banknotes and coins, most
of the 9 billion national banknotes and 107 billion national coins in
circulation were to be withdrawn. With an operation of this scale it was
clear that there would be pressure on the channels by which cash is put
into or withdrawn from circulation, e.g. cash-in-transit companies,
banks and shops. In addition, shops and citizens had to operate with two
types of banknotes and coins at the same time, and get used to
calculating in a new currency.
To ease the pressure on the cash distribution channels after New
Year, central banks and coin producers had already started distributing
euro banknotes and coins to banks and other financial institutions as
from 1 September 2001. At the turn of the year the banks had received
euro banknotes corresponding to 67 per cent of the value of the
banknotes in circulation as at 15 January 2002, and euro coins
corresponding to 96 per cent of the value of coins in circulation as at
15 January 2002. The banks were to some extent able to redistribute euro
banknotes and coins to retailers before New Year, thereby enabling them
to give change in euro from day one. This option was only used to a
limited extent; around 10 per cent of the value of the stock of euro
banknotes and 22 per cent of the value of the stock of euro coins were
redistributed.
One reason for the limited redistribution of cash denominated in euro
was that the banks' distribution to retailers (as well as the central
banks' distribution to the banks) entailed relatively high insurance and
storage costs. There were also large fines for circulating cash
denominated in euro to the public before the turn of the year.
Undoubtedly, many small retailers found these costs too high, and in any
case they would have access to cash denominated in euro at the banks
fairly soon after 1 January 2002.
On 1 January the first euro banknotes and coins were put into
circulation. This was primarily effected via three channels – cash
dispensers, banks and shops – all of which were more or less ready to
dispense euro immediately. 80 per cent of cash dispensers dispensed euro
on 1 January, and within the next few days the remaining dispensers were
converted. In some euro area member states (Germany, Luxembourg and
Spain) banks were open on 1 January, and during the next few days many
people visited their banks to acquire euro banknotes and coins. Most
large shops were able to give change in euro from day one, while smaller
shops tended to give change in the currency received during the first
few days of January. However, this soon changed as the smaller shops
also acquired ample supplies of euro banknotes and coins.
Despite the many preparations beforehand, e.g. frontloading of euro
cash and requests to the public to stock as little cash as possible
around New Year, it proved to be impossible to completely avoid
"bottlenecks" in connection with the cash changeover. In some
areas, the banks experienced large queues on the first few days of the
year. People were impatient. This was to some extent due to curiosity,
but they probably also wanted to avoid having to handle two currencies
at the same time. Consequently many chose to exchange all their national
banknotes and coins to euro right away. This behaviour took the involved
parties somewhat by surprise. Before the turn of the year a slower cash
changeover had been predicted, where people would gradually acquire euro
banknotes and coins by receiving change in euro when making payments in
national banknotes and coins.
One consequence of this eagerness to acquire euro banknotes and coins
was a surprisingly rapid cash changeover. Within a few days the national
banknotes and coins had been superseded by euro. After just one week 75
per cent of all cash payments were in euro, and after a fortnight this
figure had risen to more than 90 per cent. The national banknotes and
coins were also withdrawn from circulation at a rapid pace. National
banknotes corresponding to one third of the value of the banknotes in
circulation at New Year had been returned to the central banks within a
fortnight, and by early February national banknotes corresponding to
three quarters of the value had been returned. These figures do not even
give the full picture of the speed at which the national banknotes were
withdrawn, since bottlenecks occurred. This meant that a lot of cash
still figured in the statistics for money in circulation for a while
after it had actually been withdrawn from circulation.
So far, the introduction of euro banknotes has reduced the incidence
of counterfeiting. The many security elements of the euro banknotes and
the relatively late publication of their appearance undoubtedly
contributed to this. In the first six months of 2002 almost 22,000
counterfeit euro banknotes were found, while the corresponding number of
counterfeit national banknotes in the 12 euro area member states was 14
times higher in the same period of 2001.
The introduction of euro banknotes and coins has not been universally
applauded. It is widely believed that many shops in the euro area have
seen the cash changeover as an opportunity to raise prices
significantly. This has been criticised by consumers. In a number of
countries there have been threats of "consumer strikes", and
in Germany the euro – nicknamed the "teuro"[3]
– was even partly blamed for the economic slowdown.
However, the price statistics do not confirm this. In January 2002
the Harmonised Index of Consumer Prices (HICP) did rise by 0.5 per cent
in relation to one month before, but according to the EU's statistical
office, Eurostat, this was primarily due to a combination of higher
prices for fruit and vegetables because of bad weather, and higher taxes
on tobacco. According to Eurostat's estimates, the cash changeover can
only account for price rises of maximum 0.2 per cent up to the end of
June 2002.
What is the explanation for the discrepancy between the widely
perceived significant increase in prices in connection with the cash
changeover and the actual statistics which show relatively modest
effects on prices? On the one hand people may be exaggerating the price
effects of the cash changeover. This hypothesis is supported by the
European Commission Consumer Survey, an indicator which is prepared on
the basis of monthly consumer interviews and gives information about
consumers' opinions of inflation development over the past year.[4]
It should be noted that the indicator gives qualitative (not
quantitative) information about the perceived price development. Chart 1
shows that histor-ically the consumer indicator has mirrored the actual
price development remarkably well. However, from the year 2000 onwards
consumers' perceived inflation has increasingly diverged from the actual
inflation. This trend has become ever more pronounced during 2002 since
consumers have perceived inflation to be increasing even though actual
inflation has gradually declined since January.
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Chart 1 Perceived and actual inflation in the euro area
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Note:
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Perceived inflation is stated using the European Commission's
index. The net balance is the difference in percentage points
between the percentage of respondents stating that the cost of
living was higher than 12 months earlier and the percentage of
respondents stating that the cost of living was lower or the same.
Actual inflation is stated using HICP. Monthly observations. The
last observation is from September 2002 for actual inflation and
from October 2002 for perceived inflation.
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Source:
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EcoWin.
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One reason for the growing discrepancy between perceived and actual
inflation could be that people see large price increases for everyday
goods and services as an indication of a significant increase in prices
in general. However, this is not necessarily the case. A price index
includes a wide range of prices, and lower prices for goods which are
not purchased so often could potentially offset increasing prices for
other goods, without this being registered by consumers. Indeed this may
very well have been the case in the first half of 2002. Price rises were
above normal levels for a number of goods and services purchased
regularly – e.g. café and restaurant prices – which may, or may
not, have been linked with the cash changeover. On the other hand, other
prices increased at a slower rate or even fell, so that the overall HICP
for the euro area rose significantly less than many people perceived.
The price development in the euro area did not differ markedly from
that in Denmark at the time of the cash changeover, except for certain
subcomponents, cf. Chart 2. New Year 2001/02 definitely saw an unusually
strong price development for restaurants and cafés in the euro area
compared to Denmark. However, this area is only included in the total
price index and the price index for services at respectively 7 and 17
per cent. For the more aggregate price indices there was no diverging
development. In January 2002 Denmark still saw a higher rate of
inflation for services, including e.g. restaurants and cafés, and
relative to the euro area Danish inflation has actually increased
gradually over the past year so that inflation is currently higher in
Denmark than in the euro area.
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Chart 2
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Difference between price
developments in the euro area and Denmark
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Note:
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Price development (per cent year-on-year) in the euro area less
the corresponding price development in Denmark. Monthly
observations. The last observation is from September 2002.
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Source:
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Eurostat.
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On the other hand, it cannot be excluded that the price statistics
understate the price effects of the cash changeover. In reality it is
imposs-ible to know what the prices would have been if the cash
changeover had not taken place. To look into this issue, the Dutch
central bank, De Nederlandsche Bank, has conducted interview surveys
among retailers. In a first survey[5],
which was conducted in January 2002, it was concluded that the cash
changeover had led to an increase in the Dutch price index by 0.2-0.4
per cent. It is assessed that two thirds of this increase relates to
rounding to a "psychologically right" price, while one third
reflects the higher costs of introducing euro banknotes and coins. In
another survey[6]
conducted
in June 2002 it is assessed that the cash changeover had led to an
increase in the Dutch price index by 0.6 per cent. This figure is not
necessarily incompatible with Eurostat's price effect estimate of 0.2
per cent for the euro area, since the Netherlands has seen relatively
high inflation for some time. At the end of 2001, inflation in the
Netherlands was 5.1 per cent, compared with 2.0 per cent for the euro
area overall.
The different estimates for the price effects of the cash changeover
thus indicate that the introduction of euro banknotes and coins has had
an effect on prices which cannot be deemed to be insignificant, but
which is all the same relatively modest in relation to the aggregate
consumption pattern. Some of the price increases are attributable to
costs incurred by retailers in connection with the cash changeover. In
addition, many shops saw 1 January 2002 as a natural date to introduce
some of the price adjustments made from time to time. Therefore the cash
changeover may merely have led to concentration and earlier introduction
of price adjustments which would have taken place anyway. While the cash
changeover has been linked with price increases, it is expected that in
the longer term the euro will dampen price increases or even lead to
lower prices for certain products. This is due to the fact that the
single currency makes it easier to compare prices across borders, which
is likely to result in enhanced price competition.
The reports of higher prices in the wake of the cash changeover do
not significantly distort the picture of a successful introduction of
euro banknotes and coins. In general the new banknotes and coins
received a warm welcome. In an opinion poll conducted by the European
Commission at the end of January 2002, 80 per cent of the respondents
stated that the introduction of euro banknotes and coins had taken place
in "very good" or "rather good" conditions. In the
same survey more than two thirds said that they personally were
"quite happy" or "very happy" that the euro was
their new currency.
Footnotes
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[1] |
Austria,
Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal and Spain. |
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[2] |
For a
description of the introduction of euro banknotes and coins in
Ireland, see Ulrik Bie, From Irish Pounds to Euro, Danmarks
Nationalbank, Monetary Review, 2nd Quarter 2002. In addition,
the European Commission (Review of the introduction of euro notes and
coins, COM(2002) 124 final, March 2002), the Bank of England
(Practical issues arising from the euro, May 2002) and the European
Central Bank (Evaluation of the cash changeover, April 2002) have all
issued reports on the cash changeover. |
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[3] |
A pun on the
word "teuer", meaning expensive. |
| [4] |
The survey is
published in European Economy Supplement B, which is issued by the
European Commission on a regular basis. |
| [5] |
C. K.
Folkertsma, C. van Renselaar and A. C. J. Stokman, Smooth euro
changeover, higher prices? Results of a survey among Dutch retailers,
Research Memorandum WO no 682.E, April 2002, De Nederlandsche Bank
(accessible from the Dutch central bank's home page, www.dnb.nl). |
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[6] |
Getting used
to the euro, Quarterly Bulletin September 2002, De Nederlandsche Bank
(accessible from the Dutch central bank's home page, www.dnb.nl). |
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