Euro Launch Setbacks?

Even the introduction of euro notes and coins is expected to find a mountain to climb. The launch next year is expected to cause chaos within the eurozone. The BBC describes it as a “logistical nightmare”. Pedro Solbes Mira, the EU’s monetary affairs commissioner clarified the challenge in a speech. He said: “The distribution of fifteen billion notes and fifty billion coins to over 300 million people in 12 countries accustomed to 11 different currencies is an unprecedented logistical challenge.”

Customers are likely to be confused by the new currency. It opens up the possibility of shoppers being short-changed, or being over-charged, because they will not instantly understand the relative value of euro to their national currencies, which will be rapidly phased out. The confusion may be caused by, for example, the French franc circulating beside the new euro notes and coins. It is forecast that enormous queues could develop at points of sale as small businesses; shopkeepers and supermarkets struggle with giving the correct change from national currencies in euros.

The Baker and the Fraudster

The BBC highlights the problem: “So if a baker is handed a 10 euro note and a 500 Belgian franc note to pay for bread and buns worth 17.28 euros, it will take him longer than normal to complete the sale.” However fraud is the biggest threat to a successful launch. The 500 euro note is expected to become a favourite of organised criminals, and the EU is preparing itself for an influx of counterfeit euro notes. Otherwise the banks face a nightmare to store both the voluminous old and new currencies in their vaults. There may be simply not enough storage space.

Even so, with a British decision on whether join about two years away, a successful launch is seen as essential to prevent losses in business and consumer confidence. This would damage “the credibility of both the government and the central banks,” claimed Ms Alison Cottrell of investment bank UBS Warburg.

Euro Threat To US Economy

Meanwhile, the euro itself faces a challenge. Since its launch in 1999 the single currency has lost 30% of its value. Yet while the fall of the dollar could create benefits for American businesses in foreign markets, the American economy 'with an undervalued euro' is threatened. The improving fortunes of the euro against the US dollar, present an opportunity for the eurozone to sell low priced goods to welcoming American consumers. In turn this would widen the United States’ balance of payments deficit, and push the American economy deep into a recession.

In order to stimulate consumer confidence, the US Federal Reserve cut its interest rates in January. In contrast the European Central Bank (ECB) chose to keep its rate at 4.75% within the 12 EU member state eurozone. The ECB decided with some uncertainty about oil price movements to watch the situation in the US before taking further action.

Second Quarter Reassessment

Inflationary pressure, caused by the economic downturn in the US could also affect Europe’s own economy. Inflation in the eurozone currently stands around 2.9%, just above the ECB’s 2% target. Things could change in the second quarter of 2001. Analysts expect that oil price stability could allow the ECB to reassess its decision by May at the latest.

Meanwhile, the British pro-euro camp is grabbing the opportunity to promote their view that Britain needs the euro. As a result of the US economy’s problems, the European Movement claims that eurosceptics cannot rely on the US economy anymore to back up their arguments against euro-membership.

By Graham Jarvis MA, 12^th March 2001

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