The Euro currency

The euro currency

On 1 January 1999 the euro has been introduced in the eurozone. First it has only been used commercially in eleven countries which later became twelve (European Commission 2002, Zuckerman 1999), but on 1 January 2002 the euro replaced the national currency of over 300 million European citizens in twelve European countries (Koranteng 2001). The countries that form the world’s biggest homogenous financial zone after the United States are Belgium, Germany, Spain, France, Republic of Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland and Greece. The latter first did not qualify because of its macroeconomic parameters (Koranteng 2001, Bond Emrich 2001, Mineyev 1998). During the transition period until 28 February 2002, there has been a dual circulation of the euro and the former national currencies (Greene & Travis 2002). The United Kingdom, Sweden and Denmark elected not to join the European Monetary Union (EMU) for several reasons that this paper discusses later (Byrnes-Lenarcic 1998). Every euro coin has a common face but a specific national design on the reverse side (Koranteng 2001), whereas the banknotes have the same design in all the countries (European Commission 2002).

The success of that symbol of European integration has been great (Financial Times 2002). According to a Eurobarometer survey in November 2002, most people (51.1%) in the euro area reported they had no difficulties at all with the euro; 49.7% indicated they were “very” or “rather” happy to have the euro currency; still 38.7% considered themselves quite unhappy or very unhappy (European Commission 2004). European citizens benefit from the euro when they are travelling. They do no longer need to change currencies and it is easier for them to compare prices. Travelling outside the euro area has become easier as well as the euro is widely accepted in many countries outside the eurozone (European Commission 2004). Even though many consumers have complained about rising prices, the increased price transparency offered by the euro will make prices fall in the long-run (James 2002, Huhne 1999). “Companies will compete now as they never have before” (Huhne 1999, p.1). Furthermore, marketers will have to reduce their price differences from country to country and will have to offer goods at the prices they charge in their most competitive markets (James 2002, Huhne 1999).

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Customers can buy from the cheapest source in Europe without a problem and thus force companies to charge a lower price than the highest price a national market would bear. Besides, there are more opportunities for consumers to buy goods and services abroad (European Commission 2002). Since the launch of the euro, 12% of European consumers are more likely to buy goods in other European countries (European Commission 2004).

Concerning consumer’s perceptions of an increase in prices, it can be said that price increases have indeed occurred in some sectors such as for restaurants, cafes, hairdressers and every- day items (European Commission 2002). However, the impact of the euro is very limited and in June 2002, the inflation rate was the lowest rate for the last 2.5 years; 18%. Eurostate´s latest analysis states that the inflationary effect from the introduction of the euro was 0-0.2pp (European Commission 2004).

For businesses, the introduction of the euro meant a big challenge. Firstly, there were technical problems that needed to be solved; secondly, the introduction of the euro made consumers very cautious about making big purchases and very sensitive about increases in prices (James 2002). The physical problems for example were modifying vending machines (Semon 2002). Moreover, as mentioned above, there was an increase in price transparency and competition, leading to a decrease in prices in the long run (James 2002). 2/3 of large companies have been offering the same products in various European countries for different prices. They had to adjust prices, because of the greater price transparency that resulted from the euro (Huhne 1999). In addition to that people might have seen the converted price as too high if they did not understand the currency conversation correctly (Downe 1999). Another point is that people lost their old frame of reference and thus might have thought a lot more about big purchases and might have bought less (Hennesey, cited by James 2002).

However, the introduction of Europe’s single currency offers opportunities for businesses and on average 32% of businesses in the European Union show more interest in selling goods abroad since the introduction of the euro (European Commission 2004). For example they can benefit from simplified global procurement practices (BASF spokesman, cited by Zuckerman 1999). Moreover, a single European market reduces risks for exporters and importers by the elimination of exchange rate fluctuations and helps businesses to better plan their investment decisions. Furthermore, it eliminates various transaction costs resulting from foreign exchange operations, hedging operations, cross-border payments and management of several

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currency accounts (European Commission 2004). As for Italy for example, people stopped thinking in thousands and millions and started calculating in tens and hundreds which could have made them think that they are spending less and thus lead to an increase of consumer demand (Blitz, Crawford, Financial Times staff, Hope 2001). In Ireland, prices and wages might have appeared to have gone down because of the conversation rate, leading to the risk of inflation as a consequence of changed perceptions (Blitz et al. 2001).

The difficulties with the introduction of the euro have been that ATM machines have been running out of money or shut down as a result of a system overload. People had to wait longer in front of cash registers because of slow point-of-sale conversation issues (Mearian 2002). However, these problems seem slight compared to the great benefits of the introduction of the euro, which presents an excellent example of the European Leader’s capability to handle complex changes with excellence (Financial Times 2002). They made Europe a larger trading partner (Lloyed, cited by Emrich 2001), thereby strengthening Europe’s role in international fora and organisations (e.g. the International Monetary Fund, the World Bank, and Organisations for Economic Co-operation and Development). Moreover, the role of the euro in international trade is expanding (European Commission 2002). The eurozone as a whole is better equipped than the single national markets to withstand external shocks and changes in exchange rates vis-à-vis other major currencies such as the US dollar (European Commission 2002).

Concerning countries outside the eurozone, they did not seem to have a lot of difficulties with the new currency (Zuckerman 1999). Besides, the opportunities for foreign investors have become more attractive as they “can do business throughout the euro area with minimal disruption and can also take advantage of a more stable economic environment” (European Commission 2002). Moreover, foreign companies can profit from lower costs of doing business in Europe (European Commission 2004).

As for Denmark, Sweden and the United Kingdom, there are several reasons why they have not joined the eurozone. In Sweden, 56% voted against the euro (Analysis: Trade talks 2003). Critics made people aware of the risk of a rise in prices. They further stated that it would take away welfare-benefits and that it would deny Swedes control over their economy (Analysis: Trade talks 2003).

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