The Euro – A Story of Change On January 1, 2002, the euro (€) officially became the national currency for 300 million people in 12 countries – Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Portugal, Spain, and the Netherlands. This move constituted a major change in the region and has resulted in many fundamental changes. In this case, the broad changes will be discussed, and then some of the specifics of the process will be explored by focusing on Italy’s transition from the lira to the euro. The euro was first used by monetary authorities and businesses on January 1, 1999. On July 1, 2002, euro coins and notes officially replaced the national coins and notes of the 12 Euroland countries. In recent years, the euro has been associated with deeper capital markets and increasing demands by shareholders for better corporate governance. Steps have also been taken to pool economic data and to better coordinate banking oversight across national boundaries. And the euro has helped drive long overdue industry consolidations, from telecommunications to airlines. Overall, the euro has become the world’s second-largest currency in terms of gross domestic product and has assisted in the recent trend of slow but sure market-opening liberalization in Europe. The euro has also resulted in positive daily life benefits for European citizens. For example, when these citizens travel to other euro countries, they can more easily compare prices, and they will not have to stop at a foreign-exchange window and hand over a foreign-exchange commission. Consumers are already gaining from their new ability to compare prices in one currency. In 2001, the website of the French national railway system started quoting a single, euro-denominated price, instead of 12 different prices; the result was consumer savings of as much as 20 percent. In short, economic life in Europe has become simpler, and this is generally good for both consumers and businesses. To help further examine the impact of the currency change, the history of the euro in one nation, Italy, will be discussed. Like most of its European Union (EU) partners, Italy opted to phase in the euro gradually over 2 months. The lira, which traces its origins back to AD 794 and Charlemagne’s libra, ran alongside the new currency from January 2002 until the end of February 2002, before it was officially decommissioned on March 1, 2002 (although it is still possible to exchange lira for euros at the Bank of Italy for another 10 years). This transition period was not easy for Italy. According to the retailers’ association Confcommercio, only 37 percent of Italians were aware that checks must be written in euros as of January 1, 2002, while about 80 percent believed that the lira would continue to circulate after February 28, 2002. Furthermore, a survey conducted in July 2001 by a public think tank showed that 30 percent of Italians were still not sure what the euro was, about 43 percent were unaware of the timetable for the changeover, and only 21 percent knew how much a euro would actually be worth (1,936.27 lira). Beyond these public knowledge problems, the transition was not free. It is estimated that the total changeover cost approximately 5 trillion lira ($2.3 billion). Much of this expense fell on the business sector, which carried the overall costs of training and upgrading equipment, estimated at $934 million. Confcommercio figured that big retailers spent some 0.3 percent of yearly sales preparing for the euro, while small shopkeepers ended up investing as much as 2 percent of their revenues. To combat these problems, the Italian government took some preventive steps. First, shops and supermarkets were required to offer euro–lira calculators at checkout points, and special toll-free numbers were created to help customers to report irregularities. Second, little yellow and blue euro converters were sent to every Italian home. In the end though, after the anxieties of the first few days of the changeover had passed, Italians decided that the gadget really was not very useful and became comfortable with the new currency. There were also some practical changes that came with the new currency. The single euro is a coin and the bills are larger than the lira bills. Therefore, the biggest Christmas present in Italy in 2001 was a euro-sized wallet. Also, vending machines, which are ubiquitous in Italy, had to be refitted for the euro. This often resulted in pricing changes. In one humorous example, access to the only public toilet in Voghera, a small town in northern Italy, now costs almost twice as much as it did before the changeover. “It is all a question of coins,” the local administrators replied. “It is too complicated to modify the token dispenser.” This example also illustrates the single biggest problem Italy has had with the transition – inflation. Before the euro was implemented, prices for goods could vary by as much as 50 percent between nations. The transition therefore resulted in price fluctuations to correct these differences; and it was southern countries such as Italy in particular, which are poorer than their northern neighbors, that felt the impact of these fluctuations. Additionally, there was suspicion in Italy, as in other countries, that prices were raised due to opportunistic rounding during the changeover. With an official exchange rate fixed at 1,936.27 lira per euro, opportunistic round-number readjustments were inevitable. Therefore, the changeover to the euro resulted in inflation, especially for the small things that people buy every day – food, coffee, and haircuts. Higher-priced items, such as cars and computers, have held steady or even in some cases declined in price due to increased competition across the European Union. As the economist Katinka Barish of the Centre for European Reform noted, “You might have competition on a Euro-wide basis for cars, but you cannot do that on things like kebabs.” For example, prices in cafés and restaurants rose 4.3 percent in 2002 – nearly double the general inflation rate. Importantly, this is the inflation that people notice most, resulting in a large difference between perceived inflation and actual inflation. Italian consumers have been particularly indignant about price increases and some groups have led strikes in which consumers vowed to stop buying things for a day. One consumer, Jose Elorrieta, a Milan engineer and university professor with two young daughters, says that the price of the high-end cured ham his family buys for Christmas nearly doubled in 2002, to 60 euros a kilogram, or about $28 a pound, compared with 36 euros a kilogram, or $16.80 a pound, at the end of 2001. “It is the same story with clothes, with shoes – everything has gone up brutally, and it is almost exclusively due to the introduction of the euro,” complains Mr Elorrieta, who says he has cut back on holiday spending as a result. The government has taken steps to combat inflation. The prime minister’s mother complained that pasta prices had trebled since the euro’s launch and, in response, he took action. To combat Italy’s fast-rising prices, he called for a 3-month freeze on electric, gas, and postal prices. Even with these initial hiccups, however, the introduction of the euro should be positive for both Italy and the continent. The move to a standardized system, cooperation, and more accountability should result in economic growth for the region. As the examination of Italy’s process shows, the change has not been completely smooth, but overall it has been positive.
Posted on: Mon, 05 Jan 2015 00:58:21 +0000
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