Celebrations muted as monetary union starts

Date: 10/12/1998

The arrival of the euro in January will feel more like a whimper than a bang. But, as Tim Jones reports, the new 11-nation currency will have a far deeper impact than will be apparent at first sight

ON 1 JANUARY, Marcel Dupont, Claudia Schmidt and Guido Santini will get out of their beds, get dressed, open their front doors, take a walk in the park to shake off their hangovers and nothing will happen.

There will be no fireworks cracking overhead, no popping champagne corks and everyone will look the same as they did the day before. The euro will have arrived but nobody, except those professionally involved in the project, will have any reason to notice it.

The only euro-zone citizens to be wowed by the "sunlit towers of Santiago de Compostela or Notre Dame de Chartres" - once promised by International Monetary Fund chief Michel Camdessus - will be all-night revellers in the Plaza de Obradoiro or those slumped on the Paris train.

For the inhabitants of the Netherlands, Belgium, Austria and Luxembourg, the direct impact of the euro will be even less noticeable. All of them have been living in a quasi monetary union with Germany for at least 16 years. Suggestions that their central banks could set their interest rates independently of the mighty Bundesbank have long been greeted with puzzlement, as if the notion were unthinkable.

Yet just because 291 million people in 11 European countries feel as though nothing has changed does not mean they are right. Twenty-two days from now, a profound economic and political revolution will take place.

The political impact of the euro is truly seismic, yet the prospect of economic and monetary union has been with us for so long that it is hard to stand back and think about what it really means.

Even enthusiasts will admit, when pressed, that removing control of interest rates and the power to devalue a currency from a country's elected politicians and handing it forever to an untouchable committee of unelected bankers in Frankfurt is a gigantic constitutional step for most of the euro-11 members.

On 1 January, 11 currencies - some of which have long and proud histories and others short and embarrassing ones - will cease to exist as autonomous symbols of value.

They will instead be phantom currencies; defined as 'different expressions' of the euro. People will not see euro banknotes and coins until January 2002 but the marks, francs, lire and pesetas in their pockets will be units of the single currency in the same way as pfennigs are now of the mark.

Life will be different for companies and banks. From day one, they will have to deal with the new currency. Many multinationals, including electronics giants Siemens and Philips, have decided to carry out all invoicing and payments in euro straightaway - so forcing the same practices on their thousands of suppliers and customers. Ten governments have given companies the right to complete their accounts and file their tax returns in euro.

On New Year's Eve, national currencies will be converted into euro to 'six significant figures' and retailers will begin (many have already started) to display two sets of prices on their goods. At a stroke, consumers will be able to make a fair comparison of goods and, more importantly, cross-border services. Until now, day-to-day fluctuations on the foreign exchange markets have made this tricky.

Easily comparable prices should, in theory at least, give a boost to cross-border shopping and generate much greater interest in mail-order and electronic retailing. Shopping on the Internet has already contributed to a calamitous (for producers) fall in prices for computer components and software while national book-pricing deals are systematically challenged by the virtual bookshops operated by Amazon.com, Proxis and Alapage.

The European Central Bank, whose job it is to keep annual price inflation below 2% and nothing else, can only welcome this prospect.

However, dual pricing for goods and services, salary and bank statements, tax assessments and demands, social security payments and insurance premiums is certain to cause more than a few headaches. According to EU rules, conversions will always have to be calculated to a total of six figures while prices converted into euro will have to be rounded up or down to the nearest cent and those converted from euro will be rounded up or down to the nearest national "sub-division" (cent, centime, pence etc). If the figure comes to half a minimum unit, this must be rounded up.

If this results in exact equivalence between the two prices, then it will be a mathematical fluke. The Association for the Monetary Union of Europe (AMUE) has pointed out that the disparity is most noticeable when the sum is converted and then swapped back, for example when a price of 5 pfennigs converted at the mark/ecu rate of 1.97738 comes to 3 cents but converts back to 6 pfennigs.

Similarly, the rules fail to take account of retailers' use of 'psychological prices', such as fl499 or Dm3.99, to convince consumers subconsciously that the first number in the sequence is the price they are paying.

Conversion will rarely produce a psychological price. Selling a personal computer system for Dm1,999 is nothing like selling it for h506. The temptation to mark it down further to h499 will be huge and the consequent deflationary impact significant. For smaller-value goods such as food or confectionery, retailers are likely to change their sale quantities and pack sizes to obtain the psychological price, so making price comparisons awkward.

Similarly, a Dm5 product would come to h2.52860 once converted, which should then be rounded up to h2.53. Most retailers, unwilling to handle all those fiddly cent coins, would opt to round it up to h2.55 or ratchet it down to h2.50. The AMUE has to be right when it warns that the de facto conversion rate of the deutschemark will be two per euro.

Retailers have signed a voluntary agreement, under the auspices of their lobby group EuroCommerce, to keep these problems to a minimum. They have promised to carry out the correct conversions, ensure "comprehensive" dual-pricing of products and resist charging consumers extra for opting to pay in electronic-cash euro.

The banks have joined in. Their organisations have accepted the European Commission's 'advice' that they should not charge for simple transactions to and from euro to national currencies between 1999 and 2002. They will, however, be allowed to charge for 'euro-related services' as long as these are equivalent to those charged for similar services in domestic currencies.

It is hard to feel sorry for banks yet it is true that they, more than anyone else, have to bear the brunt of the costs of the transition to the euro. Hopes among some of them that they would be able to pass on some of these costs have been dashed. Instead, most have had to set aside hundreds of millions of ecu to pay the transition bills.

As difficult as these transitional problems may be, they are still only practicalities. They will become obvious very quickly and will be ironed out within months. The significance of the euro is not about economics, banks, retailers or book prices but politics and the democratic accountability of key policy-makers. Judging whether it has worked on that level will take years of experience and hawk-like scrutiny of the new institutions.

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