Enter the Euro European Union Prepares to Convert to New Currency Jan. 1 by Shaazka Beyerle On Jan. 1, the European Union will undertake the largest money changeover in the history of the world. Around 15,000 soccer fields of banknotes valuing more than $566 billion and 9,000 truckloads of coins worth almost $15 billion are in the final stages of production and distribution to launch the final conversion to the euro, the single currency of the European Union. "This is an important moment because the euro will go to the citizen," said Moreno Bertoldi, economic and financial counselor at the Delegation of the European Commission in Washington, D.C. In one month, 300 million people from 12 countries in Europe will begin to use a uniform set of cash and coins. German marks, French francs and Italian lira will become a thing of the past, as will the currencies of Austria, Belgium, Finland, Greece, Ireland, Luxembourg, the Netherlands, Portugal and Spain. But will this unprecedented currency conversion be a triumph or disaster for the European Union? No one will know until January, but in the meantime, opinions vary across the board. Some doomsay ers fear that in a climate of worldwide recession, the switch could be unsettling, thereby worsening Europeís economic downturn. Other naysayers believe that a less than smooth introduction of the bills and coins could frighten consumers, thereby exacerbating the EUís already dismal economic prospects. Yet many economic experts and officials from the European Union Commission, the European Central Bank and national central banks believe such fears are unwarranted. "Catastrophic predictions make easier-to-sell news," said Bertoldi. "From an economic viewpoint, I donít see why there is a reason to expect a disaster," an official from a central bank in Europe who did want to be named told The Washington Diplomat. Although some financial experts are now arguing that the paper euro will have negative economic consequences, for the past two years there were those claiming the euro was weak precisely because in the publicís mind, the process had not been completed and so was not irreversible. "In my view neither argument is particularly compelling, " the central bank official added. "I see it as a non-issue in all respects," said Luigi Buttiglione, head of European Economics at Barclays Capital in London. There are a few scenarios that Bertoldi and others think might give cause for concern. The first is that unscrupulous stores might try to "round up" the euro to bolster profits, which could create inflationary pressures. However, the European Regulation has specified rules to direct the roundings, so that roughly half of the prices will round up to the nearest cent, and the other half will round down. Even if some try to cheat, it will be difficult. Consumers are already familiar with the euro prices for their goods because of the introduction of dual pricing. In addition, public awareness about rounding up is high, and any attempts to cheat could backfire on retailers. Furthermore, some commercial enterprises will round down to increase sales. For instance, in Germany, the entire catalogue of IKEA, the popular Swedish home furnishings company, has been rounded down so that the euro price will actually be lower than the former German mark price. The second potential problem is counterfeiting. There is speculation that in the initial days of the conversion to the new banknotes, counterfeit money may circulate. In addition to a massive public awareness campaign about the new coins and banknotes, the actual bills will incorporate sophisticated security measures, including special paper embedded with watermarks, security threads, foil stripes and intaglio printing. As a result, sight, touch, and even tilt can distinguish them. Another possible disruption could come from confusion. Some social groups, such as the elderly, may find it difficult to adjust to using the new bills and coins. There may also be some glitches in the initial distribution of the euro. For instance, automatic teller machines may not all work the first day, or some banks could initially run out of the new cash. Itís worth noting that of the 14.5 billion banknotes being produced, 10 billion will actually replace existing national notes in circulation, and the remaining 4.5 billion constitute a reserve stock. Mechanisms have been put in place to prevent or minimize the impact of such mishaps. A dual-circulation period will be in effect for payments in bills and coins up until Feb. 28, 2002 (slightly earlier in France, Ireland and the Netherlands). Until this date, banknotes will also be exchanged into euros free of charge in any bank. National central banks will also continue to exchange their former currencies at no charge, coins at least until the end of 2002, and bills until 2012. "There may be some confusion in the beginning, but it will be short-lived. These micro-phenomena will not add up to a macro-phenomenon," said the central bank official. Consumer behavior should not drastically change simply because of the introduction of new bills and coins. In Europe, as in the rest of the industrialized world, most monetary transactions do not take place with notes and coins. One needs only to think how often we use credit and charge cards rather than cash to pay for even the most inexpensive items. Finally, there will be no change in consumersí purchasing power after Jan. 1 because the conversion from national currencies to the euro already took place two years ago. The value of salaries, pensions, savings, stocks and bonds will remain the same. The introduction of the euro is the culmination of a conversion program that began on Jan. 1, 1999. On that day, two momentous things happened: First, the currency exchange rates of the initial participating countriesóAustria, Belgium, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spainówere irrevocably set. Greece joined in 2000, and Denmark, Sweden and the United Kingdom have opted not to take part in the single currency, at least at this point. Second, the euro was introduced as the legal currency in these countries. What this means is that it began to be traded in the foreign exchange, share and bond markets. Government and corporate budgets and debt are being calculated in the euro. Companies have been using the euro for their financial transactions. Banks began to handle payments by companies and individuals in euros, as well as to offer new products and services, such as euro accounts and euro checks. As a result, "the institutional framework for the euro is already operating... From a macroeconomic viewpoint, the job of converting to the euro has already been done," said Bertoldi. With the final conversion to the single currency, a vision for a free, open Europe may become a reality. The European Union will complete the process of economic and monetary union, complementing its creation of a single market in which goods, services and people move freely. The two basic pillars of the EU are the euro and the European Central Bank or ECB. Established in June 1998, the ECB is an independent institution that is responsible for monetary policy, that is, interest rates, and for the introduction of the euro. What should we in the United States expect? According to Bertoldi and the central bank official, there will be little if any impact on the U.S. economy. American travelers to the 12 euro countries, however, will find things easier. No more frustration from having to exchange money constantly. No more returning home with pockets full of heavy, unfamiliar coins. Transaction costs will decrease because one will not have to change money in each country. And it will be much easier to comparison shop. So if you are looking into spending a week in a Tuscan villa , versus a French farmhouse or an inn on a Greek island, the difficulty will not be to figure out what they cost. The challenge will be to make a choice. Shaazka Beyerle is a freelance writer in Maryland.