Learning the lessons of the past

Date: 28/11/1996

By Tim Jones

WHEN embarking on a great adventure, it is sensible to have a chat with someone who has been there before.

Where exactly did they go? What did they pack? How risky was it? What mistakes did they make and how would they avoid them the second time around? Above all, was it worth the effort?

The architects of European economic and monetary union are not stupid. Their enemies may think them misguided, but unintelligent they are not.

Anybody who thinks otherwise would quickly be disabused by a visit to the European Monetary Institute (EMI) in Frankfurt, where 200-plus experts are quietly mixing together the materials that will be the bricks and mortar of EMU.

Practical problems arise every day. The EMI, Europe's mint directors and finance ministries, and officials in the European Commission all have to consider the logistics of producing trillions of new banknotes and coins, transferring bank accounts and pension payments and overcoming the psychological upheaval in the mind of the general public.

While nothing on this scale has ever been tried before, smaller-scale currency revolutions can provide valuable lessons.

The first thing to remember is that monetary union is nothing new. In fact, it is arguable that the trend towards having 15 national currencies in the EU is the aberration, brought on by the onset of trade protectionism towards the end of the last century.

Earlier in the 19th century, the growing integration of markets in Europe led to a spate of attempts to link currencies either with each other or with precious metal standards.

An Austrian-German Monetary Union (AGMU) lasted from 1857-67 as a pay-off for the Austrians, whom Prussia wanted kept out of the Zollverein customs union. A Latin Monetary Union (LMU) existed on-and-off from 1865 to 1927 between France, Belgium, Italy and Switzerland. The British and the Irish had a fixed link between their pounds until as late as 1979, when Dublin chose to enter the Exchange Rate Mechanism (ERM) without the UK.

Of course, economies are so radically different now, and capital markets so much more sophisticated and open, that these century-old examples have little to teach us today. However, European currency reforms in recent times have more to say.

The most ambitious monetary union in Europe since the Second World War took place just six years ago in Germany.

The example of German reunification is hardly perfect. After all, the introduction of the deutschemark into the former East Germany was a rushed job to offset the growing chaos in the east, and it dragged a country of 17 million people screaming overnight into a full market economy. This is hardly going to happen to anybody in 1999.

Nevertheless, logistically, it was an extraordinary feat which the EU would do well to emulate with such Teutonic precision.

In June 1990, 15-billion-ecu worth of new deutschemarks were trucked into eastern Germany, the notes alone weighing 460 tonnes and the coins 600 tonnes. Unity Day began punctually at the stroke of midnight on 1 July.

The major difference then was the unusually keen attitude of the east Germans themselves. It is hard to picture French or Dutch people -let alone the British or the Danish - taking to the streets chanting: “If the euro comes, we will stay here. If it does not, we will come to the euro!”

Consumer Commissioner Emma Bonino uses her mother as her rule of thumb when musing over the psychological impact of the switch to the euro. Older people are likely to find it hardest to cope with the change-over.

This is what happened in the UK when the country abandoned its highly-complex imperial system of pounds, shillings and pence in 1971.

The groundwork was carefully laid by the government. First, it set up a committee of inquiry, the Halesbury Committee, as early as 1961 to look into the possibilities of moving to a simpler currency.

Once the decision was taken to change to a decimal system, a new five pence coin was introduced to run alongside the shilling and a ten pence coin to accompany the old two shilling coin in 1968. A 50 pence coin came on to the market in 1969 and the whole change-over was completed in February 1971.

Some shopkeepers certainly took advantage of the switch to round up prices while others gave customers a helping hand, reminding them that eight shillings were not the same as 80 pence.

“We did have a bit of an inflationary mentality,” says one of those customers. “In particular, the confusion always was that the ten pence coin was 20 pence because it used to be two shillings.”

The European Parliament is attempting to write extra safeguards for consumers into the Commission's text establishing the legal status of the euro to help prevent deliberate rounding up.

But no legislators in the world can take the sting out of coping with a brand new currency. They can only hope that the benefits they say it will bring will compensate for any inconvenience caused.