December 12, 2002
Fixing the euro

No, they're not talking about the fundamental problems of the euro. That would be too much to hope for. However, one of the complaints of consumers in the Eurozone has been that prices have gone up in the past year as a result of the introduction of the single currency. It has been one of the big discrepancies between what people think they're experiencing and what the official inflation statistics are telling them. Looking at the Harmonized Indices of Consumer Prices (HICP), most European countries have fairly low inflation; it varies between 1% for Germany and around 3% for Italy, plus some outliers on either side. Yet in both Germany and Italy, consumers are up in arms about huge price increases.

The difference is due to the composition of the inflation indices and a bit of psychology as well. The inflation indices try to measure the overall cost of living, which includes longer-term purchases, such as computers and printers, as well as everyday items such as groceries. The biggest increases have been in the lowest-priced items, which people buy all the time. But in the inflation index, these rises are offset by cheaper inkjet printers, for instance. This accounts for some of the difference. But psychology also plays a part, as people feel the impact of high-frequency purchases more keenly than the low-frequency ones.

But there's another psychological effect here, at least according to politicians from certain European countries: the euro coins. Apparently people put a higher notional value on banknotes than on coins, so they're much more likely to spend a one euro coin than a one euro bill. So the ECB is now considering the introduction of one euro notes. I don't know whether this would work though. Prices have already been set, and printing one-euro notes now would take quite a while and of marginal impact. As with many things connected to the euro, this is going to be a political decision in the end.

What is amusing though is how deep the European inferiority complex runs though. Witness this comment from Guy Quaden, the governor of the National Bank of Belgium:

He suggested the introduction of one euro notes could be a boost to the internationalisation of Europe's single currency. "The one dollar note is one reason for the popularity of the US dollar . . . everybody knows and uses this note."
The dollar's popularity has very little to do with the one dollar note. It's more a function of the trust that people all over the world place in the US government to maintain the purchasing power of the dollar, especially in countries where the people have repeatedly been robbed by their own government's actions. The German mark had a similar status in parts of the Balkans, where the euro has succeeded it. But worldwide acceptance of the euro as a serious substitute for the dollar will only come if the euro is seen to be as stable, reliable and trustworthy a source of value as the dollar. It's going to take a long time to build that kind of reputation. In any case, the ECB and European politicians would be better advised to stop obsessing about the dollar and start focusing on the economic problems that beset the European continent. Once they fix those problems, the euro's acceptance will increase too. One euro notes are not going to make the slightest bit of difference.

Posted by qsi at December 12, 2002 11:15 PM | TrackBack (0)
Read More on European Union , Monetary Matters
Comments

Tangent -- Funnily enough, I (and many collegues) have been hoping and praying that the US will start issuing more of the dollar coin, and eventually discontinue the paper one, considering how many machines we have to use in daily life (food, transport) and how often they temperamentally spit bills back in our face.

Posted by: crl, New York, NY on December 13, 2002 03:34 AM

I think Guy Quaden is dead wrong, I was in Kazakhstan last winter and nobody would touch dollar bills, or even twenties. But new $100's is what everyone kept their savings in, and they all checked for the silver stripe (fortunately my bank had given me mostly new notes)

Posted by: Puff on December 13, 2002 10:27 PM
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