New Currency, New Issues
Leon Korte
The University of South Dakota School of Business
Vermillion, South Dakota
November 2002
Introduction of new currency
Political and economic concerns
My family and I celebrated Christmas and the New Year in Europe this past winter. Our older daughter spent an academic year studying in Nottingham, England and we flew overseas to spend the holidays with her. Christmas in England, while not the Dickensian Christmas one imagines from Victorian literature, had a different feel than that usually experienced here at home. The celebrations and traditions differ from what we might experience here in the States, and I suppose if we were to live over there the frustration level might return. Suffice it to say I enjoyed Christmas 2001 more than I have most other holiday seasons, but that is another tale.
We spent The New Year holiday in The Netherlands. It was interesting to watch the midnight countdown in five different languages [Spanish, French, German, Italian, and Dutch]. Granted, I did not understand what was said, but clocks are the same most everywhere. Shortly after the stroke of midnight, the fireworks began. In The Netherlands families celebrate the arrival of the New Year with rockets, sparklers and firecrackers. Our hosts were concerned that their new neighborhood might be as exciting as their previous neighborhood, but the display continued for an hour. It was a different experience and one I hope to do again sometime in the near future.
This was my fifth trip to Europe in the past five years. Aside from the desire to visit my daughter I especially wanted to be there this past January for an academic reason. After many years of negotiations and two years of preparing the population for the change, the Euro was introduced as the official currency of twelve countries (Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Austria, Portugal, and Finland). I wanted to be there when it happened just to see how such a transition occurred. I was impressed at the orderliness of this monumental task. The political and economic ramifications remain to be seen.
We flew from London to Amsterdam on December 30, two days before the currency conversion for the general population. The first and foremost question is what do we do for money for the next two days. It’s great to be staying with family. My brother-in-law suggested we not hit the cash machine until January 1 since the euro would not be dispensed until then and it was not really efficient to try to deal in two currencies in four days. If he was willing to pay for dinner and wine, I was willing to wait. In reality, credit card transactions had been denominated in euros for nearly two years. With the exception of small purchases too small for the credit card, we were using euros when we got there.
On January 1, we took a walk around the neighborhood and stopped to get cash: the new euro. So did many other people. We saw two or three cash machines with queues of ten to fifteen customers before we were able to find a machine less busy. While much of the population was celebrating the turn of the calendar page, the financial institutions were servicing the cash machines: out with the old (guilders), in with the new (euros) -- a very orderly process with minimal disruption. On January 2, we saw our only possible disturbance. We were walking through Dam Square in Amsterdam around the time banks were closing for the day and saw several young people trying to get into the building. Whether the problem was that they were too late for that day’s business or there were problems because of the currency change is difficult to tell. The language barrier raises its ugly head at the most inopportune times.
The Netherlands had the shortest transition period of the twelve countries involved. During the transition period cash purchases could be made using either the old currency or the new currency, but change was given only in the new currency. It was not as difficult as it may appear. For the two years prior to the switch the exchange rate had been fixed. The euro was valued at approximately 2.20 Dutch guilders. All posted prices in stores and restaurants were shown in both guilders and euros for the twenty-four months prior to the conversion. Sales clerks were equipped with purpose-built calculators that automatically translated the amount of necessary change from the local current to euros. By February 28, 2002, all participating countries were to have withdrawn their old currency and coins. The Dutch set a deadline of the end of January 2002. In some countries it was possible to bring in old currency and coins for conversion; in others currency but not coins could be converted at a bank.
There are eight euro coins denominated in 2 and 1 euros, then 50, 20, 10, 5, 2 and 1 cents. Every euro coin carries a common European face. On the obverse, each country designs its own motif. The common European face of the coins represents a map of the European Union against a background of transverse lines to which are attached the stars of the European flag. It was interesting that before we left The Netherlands on January 3, we had coins from three different countries. There are seven euro notes. In different colors and descending sizes they are denominated in 500, 200, 100, 50, 20, 10 and 5 euros. The notes are uniform in design with no national side. The designs are symbolic for Europe's architectural heritage and do not represent any existing monuments.
The introduction of the euro has minimized some of the hassle of European travel. No longer must we convert into multiple currencies as we travel around the continent. At the same time, the introduction of the euro has removed some of the romance of European travel. No longer can we convert into multiple currencies as we travel around the continent. It does make it easier to compare prices between the local currency and the dollar, but it lent an air of mystery to travel – if this is Tuesday it must be Germany (I have never been to Belgium). It certainly has eased the burden on business across the national border of the member states of the European Community.
The general population has made the transition. Business has accommodated the change in currency. The old currency may surface from time to time but it will be absorbed into the system. The primary issue of the adoption of a common currency for twelve nations transcends the issues faced by individuals and businesses. The new issues are at the macro-economic level rather than the micro-economic level. During that trip I mentioned to a friend that I was surprised at the process of the change. His response was that it should not surprise Americans about the desire or success of a common currency across the European Community. After all, the Americans had done this same type of thing two hundred years ago. Many Europeans recognize the federal nature of the United States to a greater extent than do most Americans. For us, our common currency has become something more than second nature. For Americans economic policy is not an issue for the individual states; that is the primary issue for the euro.
National economic policy is a potential stumbling block for the euro. The treaty that established the currency has set expectations about budget deficits and other macroeconomic issues. The flexibility these countries had in setting national economic policy is compromised to some extent and there have been concerns with some of the policies followed by individual members. As of the date of this writing five countries are approaching the treaty limits for budget deficits.
The euro as a medium of exchange is a foregone conclusion and will continue unless serious complications arise behind the scenes. The euro as a tool of economic and political policy is a more complex issue. It will be difficult to separate from the union if a country experiences severe economic disruption. It will also be difficult to make changes in local economic policy when the exchange rate of the currency does not reflect the standing of the local conditions in the global market. The European Union now comprises more consumers than the United States. The status of the dollar as an international medium of exchange may be challenged in the future, but for this writer the economic foundation upon which the closest contender is based may not be as solid as one would hope. In political and macro-economic terms, the issues of the common currency in Europe have not yet been fully defined, identified, or addressed. The interesting part is only beginning.
The euro is the legal tender for the European Union which comprises a population which exceeds that of the United States. The economic foundation for the euro is diverse politically which may pose some interesting challenges in the coming years.
02/23/2004 05:14:03 PM -0600