EURO CASH

EURO CASH
By Nicholas Newman

Introduction:
The Euro was introduced on New Years Day 1999 as an electronic trading currency, on January 1 2002 the € comes into being as actual currency, freely usable in all cash transactions throughout the Euro zone. For individuals the effect will be that they can use the Euro as a common currency throughout the Euro zone.

In 1998, a Daily Telegraph journalist as an experiment, began with 1000 Belgium Francs and then proceeded to convert the money from one EU currency to another in turn. Eventually, only 500 Belgium Francs remained, due to the rest going to pay for currency exchange rate fees charged by the banks. This cost of converting currencies is estimated to cost the European economy 0.5% of EU GDP.

Thus Europe’s 300 million consumers will finally see Europe’s Common Currency the Euro on 1 January 2002. Since 1999 Europe’s printing works and mints throughout the Euro-zone have been busy night and day, producing the necessary 14.5 billion banknotes and 56 million coins. (ECB 2001)

Background:
As a concept creating a Single European Currency, the € is not new, since the founding of the EU, Europe has been working to towards this end, i.e. the €. At present Britain, Denmark and Sweden are the only EU member states that have opted for the time being, to delay membership of the Euro-zone.


As part of continuing efforts to promote prosperity within all the regions of European Union, the Euro is part of efforts by EU member states to implement policies that will encourage the creation of a Single European Market throughout the European Union. The implementation of the Euro will further assist in the removal of the current trade barriers that divide EU economies; this is especially the case in the labour, finance and movement of goods in the markets of Europe. (Economist 2000)

How does it work?
Europe’s € is, in many ways, similar to the US $, in that just as the member states that make up the United States share a single market, common currency and interest rates, so do members of Europe’s Euro-zone today. However, until the change over to notes on January 1 2002, Euro-zone citizens have to make do with the old currency of individual member states. At present the various relative exchange rates between Euro-zone member states have been fixed, so for all intents and purposes, Euro-zone members are trading in the Euro but only in paper and electronic banking transactions until the introduction of coinage and notes next year. For foreign exchange dealers this has meant they no longer trade in Francs, Deutschmark, Lira etc., but in Euros against other non Euro-zone currencies, including the $ and Yen. As with the £ there will be 100 cents to one €.

Already, major European companies including Ford Europe, Philips and Bayer have set up pan-European cash management systems and procurement systems that operate in Euros only for their European operations. For many consumers the impact of the € is being felt, even in EU countries outside the current Euro-zone, especially for cars, since the € has enabled consumers to make price comparisons on cars throughout Europe. This has led to a fall in car prices in many EU countries. In terms of the labour market for many sectors, there is no longer a regional or national market, instead as a result of the Euro, instead there is a Europe wide labour market, since the € has enabled workers to compare wages more easily across frontiers. (BBC 2000)

The Critics’ Case
As you might be already aware, there appear to be many groups that are against Britain joining the Euro including the Bruges Group and the Institute of Directors. The case they make against the Euro is thus:

1. The impact of the Euro could be a reduced market share for local businesses due to greater competition from elsewhere.
2. Increased potential for price wars, especially as large firms enter local markets, previously served by smaller companies.
3. The impact of having a single Europe wide monetary policy applied to the whole of Europe. Already, firms in manufacturing firms complain about the damage UK determined interest rates have on their ability to compete. They argue Europe determined rate will further damage their competitiveness, since such rates will be designed only to benefit firms in Europe’s prosperous core regions.
4. European consumers fear that they will be cheated when the new notes and coins are introduced. (Le Bureau European des Unions de Consommateurs 2000).
5. The loss of economic flexibility in the ability of countries to competitively devalue their currencies, as part of efforts to counteract the impact of high inflation and balance of payments deficits, as was often the experience of Britain in the Boom and Bust cycles of the 1980s.
6.The biggest criticism is not one of economics, but loss of political control of monetary policy and the fear of a heavier tax burden, because member states might find this the only way they can manage rising inflation. (Financial Times 2000)

The Advantages of the Euro
The case for Britain joining the € is supported by such organisations as Britain in Europe and the European Movement. Their main economic arguments are thus:

1. Both consumers and firms would be able to make significant savings in the cost of transactions within the Euro-zone, leading to the development of Europe wide markets for goods and services as a result of not having to convert currencies. This is already benefiting many poor regions of Europe including Portugal (Independent 2001)
2. Firms within the Euro zone are already finding it easier and cheaper to raise money to invest, enabling businesses to improve their competitiveness on the world markets.
3. The introduction of the € is already demonstrating savings for business in reducing the cost of transactions between member Euro-zone states. The € enables cash received from several different countries to be lumped together instantly and without conversion and deposited in the highest interest earning country.
4. Clearer and better information on input costs and competitors prices enable improved opportunities for long term planning and strategy formulation, as there will be less uncertainty concerning prospective returns on foreign EU operations. (Financial Times 2000)
5. Euro zone economies are as part of a massive market are not expected to fluctuate as dramatically as in the past from boom to bust. This added stability is expected to reduce inflationary pressure and stimulate the economy of Europe.

Conclusion
Unfortunately for the reader, there is no clear balance of advantages and disadvantages on joining the Euro; it appears to be more a question of your own personal economic and political preferences, such as how governments approach managing their monetary policy. For governments the question of joining the Euro is a trade off on having higher unemployment and low inflation or lower unemployment with higher inflation; while some governments see price stability as their objective. You have to make up your own mind on the subject.

Questions
1. When will the € notes and coins be available to customers in the Euro-zone?
2. Which companies have introduced pan-European cash management systems and procurement systems that operate in Euros only for their European operations?
3. List two advantages of introducing the €?
4. What are the disadvantages for firms?