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Saturday, December 15, 2001


Europe’s Monetary Big Bang and the End of the Drachma

The introduction of euro notes and coins marks the largest cash-conversion experiment in history. It is also widely expected to wreak havoc in retail transactions, at least in the first few days of 2002 in Greece, and lead to a short-lived uptick in inflation without, however, any discernible impact on other macroeconomic variables, including economic growth.

The euro will become the legal tender of the Eurozone, and therefore Greece, from the beginning of the new year. On so-called E-Day, January 1, 2002, actual euros will start circulating along with national notes and coins. In Greece, the drachma will be phased out and replaced by February 28.

As E-Day approaches and the magnitude of the experiment becomes clearer, officials and ordinary citizens in Greece are bracing for problems in routine transactions, from dealing with taxi drivers to buying knickknacks at the local kiosk. Unfortunately, taxi meters will not be converted into euros until March 1. Until that time, therefore, all fare conversions from drachmas into euros will have to be calculated on the spot, undoubtedly causing delays and misunderstandings for the first two months of 2002.

Some analysts think that problems will be compounded by the fact that an estimated 80 percent of ATMs in Greece will only dispense 20- and 50-euro notes on January 1, 2002, as opposed to ATMs in other Eurozone countries, which will make five- and 10-euro notes available as well. Some think that this will create a technical shortage in five- and 10-euro banknotes at first, forcing people to line up at banks and supermarkets to secure coins or euro notes in smaller denominations.

“We expect long queues, and many queries from clients in January. It is going to be a difficult month,” says Yannis Pehlivanides, head of Nova Bank. “Eventually, things will get better but it will take some time before everybody gets used to the new currency.” But Christos Gortsos, general secretary of the Hellenic Bank Association, says criticism of the banks is unfair.

“There may be problems in the first few days, but things will get better afterward. I believe everybody taking a longer-term view will come to accept that it is better to have ATMs giving out 20- and 50-euro notes instead of five- and 10-euro notes,” he said. “In the first couple of days, anyone who wishes to have coins or small notes can get them at the banks.” Gortsos says that it is not technically feasible at this stage, given the brief period left until the currency’s introduction, to have ATMs distribute notes of smaller denominations. He also points out that the European Central Bank has allocated a greater proportion of euro notes to Greece, about six percent of the total outlay, in recognition of the country’s cash economy.

Officials at the finance ministry recently tried to press banks to supply clients with smaller denominations, but to no avail. To make things more complicated, euro-awareness TV spots were withdrawn to be redesigned to stress usage instead of general information. Given the situation, it is not a coincidence that Greece is among the laggards in preparing for the physical introduction of the euro, topping the scoreboard created by the European Union (EU) commission to measure problems in supplying euro notes in member countries. In addition to transaction issues, some analysts stress that the currency changeover may have macroeconomic consequences, as some people rush to spend their national currencies in the last quarter of 2001 or by the end of February at the latest.

According to this scenario, Eurozone economies will experience a temporary decline in consumer demand in the first couple of months of 2002 as consumers gradually adjust to the new situation and cope with an insufficient supply of euro banknotes and coins. If true, this problem should be more acute in countries such as Greece, where the use of credit and debit cards is limited and cash is king. Those who argue along these lines say that most consumers will not be familiar with the new prices and will choose, therefore, to put off some of their purchases temporarily.

However, the biggest concern is of a rise in prices if businesses, especially retailers, take advantage of the expected chaos to raise prices under the cover of conversion. Some price hikes related to the significant initial costs of the changeover – such as information-technology and accounting changes, or holding excess liquidity – may be justified, but not all. Some economists share this view, saying that it is going to be inflation, not economic growth, that will be affected temporarily by the changeover.

“The introduction of the euro will have a clear-cut and imminent macroeconomic implication. It will put upward pressure on inflation in the first couple of months of the year due to the rounding off,” says Platon Monokroussos, head of economic research at EFG Eurobank Ergasias. Monokroussos says that the combination of rounding off prices and unfavorable base effects may drive Greece’s annual inflation rate above three percent in January and February. Headline inflation stood at 2.4 percent year-on-year in November, but is expected to close the year at around 2.7 percent.

Nevertheless, others contend that the scope for price hikes during the changeover period is limited because intense competition in retail trade will not make it possible for firms to boost their profit margins. Moreover, introducing the euro will increase cross-border transparency in pricing, therefore enhancing competition. Indeed, some large companies have already announced that they will not raise prices for a few months. The country’s largest supermarket chain, Carrefour-Marinopoulos, announced on November 15, 2001, that it would freeze the prices of all products until March 15, 2002, to help facilitate Greek consumers’ familiarity with the euro.

Group general manager, Didier Fleury, said prices converted from drachmas into euros will be rounded off downward to the consumer’s benefit. To help consumers compare prices in drachmas and euros, prices will be quoted in both currencies until the end of June 2002. Foreseeing possible problems during the changeover period, the group hired temporary staff to work from mid-December through mid-February.

Notwithstanding the initial impact from the introduction of the euro, most economists and commentators agree that the single European currency will bring about price transparency that will benefit competition. “Following the first couple of months or so, the euro is expected to enhance competition and put downward pressure on prices,” says Monokroussos. Gikas Hardouvelis, chief economic advisor to prime minister Kostas Simitis, also believes that the euro will enhance competition. “If some prices are too high here, it is likely that these goods will be imported from elsewhere, exerting downward pressure on prices,” he said.

As far as economic growth is concerned, Hardouvelis does not see any risks, a view echoed by the head of Eurobank’s economic research department, who expects the physical introduction of the euro to have a neutral effect on Greek GDP (Gross Domestic Product) growth. “I do not see the euro having an impact on GDP growth. Greek economic growth will remain robust in 2002, surpassing the EU average by far on the back of a boost in disposable income as inflation recedes and tax cuts are implemented. A credit boom and other budgetary incentives will also contribute to a pick-up in growth,” Monokroussos added.

Even if macroeconomic concerns turn out to be groundless, the introduction of the euro will highlight some important differences in nominal wages and purchasing power between Greeks and their counterparts in other Eurozone countries. Recent figures confirm that. According to Eurostat, Greek salaried workers receive 57 percent of the average EU salary and rank second from the bottom, surpassing only those of Portugal, who receive 43 percent of the EU average. Spanish workers rank third from the bottom with 74 percent of the average, and Irish workers rank next with 90 percent. Nevertheless, these differences can be justified to some extent by the fact that the productivity of the average Greek worker stands at just 56 percent of the EU average.

When it comes to cost of living, that of Greece amounts to 76 percent of the EU average, compared to 68 percent for Portugal, 84 percent for Spain, 87 percent for Italy, and 96 percent for the Netherlands and Belgium. It is no coincidence, therefore, that when salaries are adjusted to take into account the cost of living to determine purchasing power, the average Greek worker ends up worse off, second from the EU bottom, just above his/her Portuguese colleague.

Given all these potential problems linked to the introduction of the euro, as well as visible or invisible macroeconomic risks, one has to wonder: Is there an area in which Greece clearly gains from the euro’s introduction? The answer is, yes, in Greece’s upgraded role as the center of a second Eurozone spanning the Balkans, in which an estimated six billion or more deutschemarks still circulate. The Bank of Greece has already signed an agreement with Bulgaria and Albania to supply them with euros in exchange for other EU currencies such as German marks. The same holds for Cyprus. (An additional 30 billion marks circulate in Turkey, which, however, has signed an agreement with the German central bank to supply it with euros.)

The central banks of these neighboring countries will deposit their cash, bonds, or foreign exchange denominated in national EU currencies with the Greek central bank, which in turn will supply them with euros. Regarding the euro’s introduction and the withdrawal of EU national currencies, the deputy governor of Greece’s central bank, Nikos Garganas, states that “...Greece becomes de facto the center of a second euro area since estimates and figures show that the euro will become the currency of commerce in the Balkans.”

For better or worse, E-Day is a fortnight away. It promises many headaches, but also excitement and benefits. If nothing else, Greece obtains legal tender that might one day become a reserve currency internationally, just like the dollar.

Dimitris Kontogiannis is a financial columnist for the Greek daily, Eleftherotypia.
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