sign in sign up
<<
Home , Austrian schilling, Belgian franc, Dutch guilder, French franc, Greek drachma, Luxembourg franc

FEDERAL RESERVE BANK OF DALLAS Issue 2 March/April 2002 Southwest Economy ...... The Cash Changeover At midnight on Dec. 31, 2001, for the first time in history, a that had not been debased through had its status re- voked. From its introduction in 1948, the German mark was one of the world’s strongest and was viewed one of the great achievements of the postwar Bonn Republic. Its replacement by the euro signifies a major milestone in . On Jan. 27, the mark was joined by the Dutch , and on Feb. 9 the Irish punt dis- appeared into history. The French became a thing of the past on Feb. 17, and at midnight on Feb. 28 all of the legacy currencies of the 12-nation euro area ceased to be legal tender. The euro is now the only legal tender in most of Western . The introduction of euro and , which began on Jan. 1 of this year, was a great success. The predictions of long lines at retail out- lets and railway stations were not borne out, and the European public has embraced the new currency with an enthusiasm that surprised even its most ardent supporters. There were glitches, but they were few. The cash changeover, far from marking the beginning of the end of economic and mone- tary union (EMU) as some had expected, simply marks the end of the beginning. (Continued on page 2) ...... The Economic Impact of Biotechnology It’s as daunting a task today to divine how biotechnology will affect INSIDE: future economic activity as it might have been for economists in the 18th, New Economy, 19th and 20th centuries to forecast how the steam engine, electricity and the microchip would influence and eventually transform the . New Recession? With the assistance of mind-boggling inventions, humankind’s bucolic exis- tence has morphed into a world that our agrarian ancestors would scarcely • recognize. Biotechnology may change our world as much.1 Venezuela Addresses Even though the bioscience industry has been around for 25 years and Economic Stress the gargantuan task of mapping the human genome is complete, it’s still not clear to what extent life science technology will affect our economy. Some observers have already labeled this the “Biological Century,” betting that advances in the life sciences will yield changes more momentous than those of electricity and computers. Such predictions may be overinflated, but bio- (Continued on page 6) In 1950, when French Foreign Minis- notes and coins to financial institutions the national central banks, the ter Robert Schuman proposed the first and other businesses across the euro are issued by the national treasuries of steps toward greater integration between area to facilitate a smooth transition. In the participating countries, subject to the and , he noted that addition, the payments infrastructure ECB’s approval. Coins issued by national (the 200,000 ATMs, the 3.5 million-plus governments will be legal tender through- “Europe will not be made all at vending machines and so on) had to be out the euro area. once, or according to a single plan. recalibrated to dispense and accept the In contrast, don’t have It will be built through concrete new currency. any distinguishing national features, achievements which first create a de As large as these tasks were, they apart from a letter code at the beginning facto solidarity.” probably didn’t require three years. Pro- of the serial number to denote where the duction of the euro banknotes began in note was printed. The front features win- These achievements were modest at 1999 and peaked at more than one bil- dows and gateways from different archi- first: sharing of sovereignty over coal lion notes per month in summer and fall tectural styles (symbolizing openness), and steel (the raw materials of industrial- of 2001. production began even while the reverse side features bridges age warfare) and later the creation of a earlier, in mid-1998. A more important (signifying cooperation). (See the box common market. Over the years the in- reason for the three-year transition was titled “The Euro Banknotes.”) tegrationists’ ambitions have grown, and to allow businesses and consumers time The general public’s uptake of the so have their achievements: the creation to familiarize themselves with the new euro notes and coins proceeded some- of a single market for goods, labor and currency before being forced to use it in what quicker than expected. Banknotes capital; the transformation of the European all transactions. had been distributed (or “frontloaded”) Economic Community into the European to financial institutions throughout the Union (EU) of today; expansion from six Characteristics of the euro area as early as last September, and to 15 members; and now the completion Notes and Coins financial institutions in turn distributed (or of economic and monetary union. In The denominational structure of the “sub-frontloaded”) banknotes and coins fewer than five years we may see the EU euro follows a standard 1-2-5 (or binary- to the retail sector and other cash busi- expand to 25 members, and before the decimal) pattern, with denominations of nesses in the last months of 2001. Starter end of the decade the euro may well be 1 , 2 cent and 5 cent, 10 cent, 20 cent kits of euro coins were distributed to the only currency used in all of Europe and 50 cent, and so on up to 500 euro. the general public in mid-December, and and may even have made tentative steps The highest denomination coin is the €2 at midnight on Dec. 31, ATMs across the into Asia. The completion of EMU is a coin, and the lowest denomination note euro area started disbursing euro bank- concrete achievement par excellence and is the €5 note. Notice that the definitional notes. one that fundamentally alters the charac- denomination, €1, is a coin. The coins all Of the 200,000 or so ATMs in the ter of the . have a common European side, and the euro area, more than 80 percent had reverse side features national designs. been converted to issue euro on Jan. 1; The Scale of the Task Unlike the banknotes, which are issued by Jan. 3, the proportion was 97 percent The euro has been around for by the European (ECB) via (Chart 1 ). About half the coin-operated slightly more than three years. During that time, it has not had a physical form, existing only as a unit of account, while the notes and coins of the legacy curren- Chart 1 cies continued to circulate as the medium Uptake of the Euro of exchange. A three-year transition be- Percent tween the launch of EMU and the intro- 100 duction of the notes and coins, though not specified in the 90 governing monetary union, was deemed 80 necessary in part to allow sufficient time 70

for production of the new currency. 60 Approximately 15 billion euro banknotes 50 (with a face value of about €635 billion) 40 Conversion of ATMs had to be produced to replace the legacy Use in retail transactions currencies’ banknotes. Likewise, some 50 30 Conversion of vending machines Euro as fraction of all banknotes in circulation billion euro coins (with a face value of 20

about €15.75 billion) had to be minted to 10

be ready for the Jan. 1 launch date. 0 Once production was nearly com- 12/31/01 1/10/02 1/20/02 1/30/02 2/10/02 2/20/02 2/28/02 plete, there remained the formidable SOURCES: ; European Commission Changeover Information Network. logistical challenge of distributing the

2 FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH/APRIL 2002 Table 1 there may be something to this. Euro area inflation in January was 2.7 percent, up Key Dates in the Withdrawal of Legacy Currencies from 2 percent in December. Usually when a new currency is in- Exchange at banks Redemption at troduced, the conversion rate makes the after end of central bank after End of legal tender legal tender end of legal tender new currency some convenient decimal multiple of the old currency. The last time Feb. 28, 2002 To be decided Indefinitely such a reform was undertaken in Europe individually by banks was in France in 1960, when the old after Feb. 28, 2002 franc was replaced by the new “heavy” Feb. 28, 2002 Dec. 31, 2002 Notes: Indefinitely franc at a rate of 1 new franc to 100 old Coins: End of 2004 . When the introduction of a new Finland Feb. 28, 2002 To be decided Feb. 29, 2012 currency simply entails dropping a few individually by banks zeros, shoppers can easily compare prices France Feb. 17, 2002 June 30, 2002 Notes: Feb. 17, 2012 in the old and new currencies. Coins: Feb. 17, 2005 However, the irrevocable exchange Germany Dec. 31, 2001 At least until Indefinitely rates between the euro and most of the Feb. 28, 2002 legacy national currencies are far from Feb. 28, 2002 Positive Notes: March 1, 2012 being simple multiples. One euro is equal (to be decided Coins: March 1, 2004 to 1.95583 German marks, 6.55957 French individually by banks) francs, 0.787564 Irish punts and so on Ireland Feb. 9, 2002 For a period not yet Indefinitely (Table 2 ); hence consumers’ fear that re- specified tailers would round prices up. There is Italy Feb. 28, 2002 Banks to decide March 1, 2012 anecdotal evidence that the price of a in February 2002 pint of Guinness in Dublin is now €3.15, Feb. 28, 2002 June 30, 2002 Notes: Indefinitely instead of the €3.11 it should be if con- Coins: End of 2004 verted at the fixed exchange rate. How- Jan. 27, 2002 Dec. 31, 2002 Notes: Jan. 1, 2032 ever, the cost of a one-way subway Coins: Jan. 1, 2007 ticket from the Frankfurt airport to down- € Portugal Feb. 28, 2002 June 30, 2002 Notes: Dec. 30, 2022 town Frankfurt is now 3.10, instead of Coins: Dec. 30, 2002 the €3.12 it would have cost if the old Feb. 28, 2002 June 30, 2002 Indefinitely fare were converted at the fixed ex- change rate. Standard economic theory tells us that this kind of currency reform should not lead to any significant change in the price vending machines in the euro area had redeemed for euro at commercial and level, up or down. For every example of been converted to accept euro on Jan. 4, national central banks. However, only four a price rounded up, there is sure to be a and by the end of January the proportion countries (Austria, Germany, Ireland and was close to 95 percent. The euro was Spain) will redeem national coins and being used in more than half of all retail banknotes indefinitely. Belgium and Lux- transactions after only three business embourg will redeem old banknotes in- days and exceeded the 90 percent mark definitely but will stop redeeming coins Table 2 by Jan. 12. The euro replacement ratio, at the end of 2004. The Netherlands will The Irrevocable Exchange Rates which is the ratio of euro banknotes redeem notes until 2032 but will cease in circulation to the total of euro and redeeming coins in 2007. The other coun- 1 euro = 13.7603 national banknotes in circulation, hit 50 tries have set various cutoff dates for 40.3399 percent on Jan. 10 and was 65 percent redemption of notes, with the soonest 2.20371 on Jan. 25. By the end of February, being 10 years from now. Table 1 gives 5.94573 national banknotes made up less than 15 the complete details. 6.55957 percent of the stock of notes in circula- 1.95583 German mark tion. Some may never be exchanged for Was the Cash Changeover 340.750 euro because they have been lost or de- Inflationary? 0.787564 Irish punt stroyed or will be kept as souvenirs or A common fear among European con- 1,936.27 Italian collector’s items. sumers was that businesses would take 40.3399 Although all of the legacy currencies advantage of the cash changeover to raise 200.482 ceased to be legal tender at the end prices surreptitiously. And the most recent 166.386 of February, the currencies can still be data on inflation in the euro area suggest

FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH/APRIL 2002 3 The Euro Banknotes

€5 note Size: 120 x 62 mm (4.75 x 2.4 in.) Architectural period: Classical

€10 note Size: 127 x 67 mm (5 x 2.6 in.) Architectural period: Romanesque

€20 note Size: 133 x 72 mm (5.2 x 2.8 in.) Architectural period: Gothic

€50 note Size: 140 x 77 mm (5.5 x 3 in.) Architectural period: Renaissance

€100 note Size: 147 x 82 mm (5.8 x 3.2 in.) Architectural period: Baroque and rococo

€200 note Size: 153 x 82 mm (6 x 3.2 in.) Architectural period: 19th century iron and glass

€500 note Size: 160 x 82 mm (6.3 x 3.2 in.) Architectural period: 20th century modern

SOURCE: European Central Bank.

4 FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH/APRIL 2002 Chart 2 place, the British delegate made the con- fident assertion, “Gentlemen, you are try- UK Voters’ Assessment of the Euro’s Prospects ing to negotiate something you will never Over the Next 10 Years be able to negotiate. But if negotiated, it Question: Leaving aside how you would vote, in 10 years’ time will not be ratified. And if ratified, it will which of the following is most likely? not work.” At a session on the euro at the Percent American Economic Association’s recent 70 meetings, a senior ECB official took some Euro the currency of most of Europe, Britain included delight in reminding his audience of this 60 Euro the currency of most of Europe, Britain excluded Euro will have failed, and each country will have their own currency remark and of the similar sentiments Don’t know 50 expressed by many North Americans that EMU would never get off the ground. 40 The successful introduction of the euro notes and coins completes the tran- 30 sition to economic and monetary union. The fact that the euro now has a physi- 20 cal form will make it more real to the

10 average citizen and may begin to foster the European identity that was among 0 the goals of the currency’s architects. July 1999 November 1999 June 2000 September 2000 May 2001 December 2001 With the euro now the only coin of the SOURCE: ICM Research, London. realm in most of the EU, monetary union will be just that much more difficult to reverse, not that there is any provision for exit in the governing treaty. The suc- less well-publicized example of a price opt-out clauses to the treaty governing cess of the cash changeover may prompt rounded down. The January increase in monetary union. However, many mem- the pre-ins to join EMU sooner rather inflation is in line with what would have bers of the UK’s current Labor govern- than later. been expected on the basis of existing ment, including Prime Minister Tony —Mark A. Wynne seasonal patterns, recent price behavior Blair, are enthusiastic about taking the and an increase in fuel costs in January. UK into EMU, possibly soon. Europhiles Wynne is an assistant vice president and Furthermore, inflation in the United King- are hoping the process of “euro creep” senior economist in the Research Department dom (UK), which does not participate in will lower resistance to the single currency of the Federal Reserve Bank of Dallas. the euro, accelerated by a comparable and generate consent through familiarity. amount, from 0.9 percent in December Many leading UK retailers have announced to 1.6 percent in January. Inflation in Swe- that they will accept euro, and some den, another nonparticipant, increased components of the payments infrastruc- from 1.6 percent to 2.9 percent. ture (vending machines, for example) will be calibrated to take euro. Further- And Now? more, many large multinational busi- Going forward, the completion of nesses operating in the UK are requiring the cash changeover raises many impor- that their suppliers invoice them in euro. tant questions. One of the biggest is: And there is some evidence the elec- How soon will the countries that are cur- torate is slowly acknowledging that the rently members of the EU but not mem- UK will probably be a member of the bers of EMU (the so-called pre-ins) euro area eventually. Last December nearly adopt the single currency? Of the 15 cur- two-thirds of British voters polled agreed rent EU members, only three—the UK, with the statement that the euro was Sweden and Denmark—do not partici- likely to be the currency of most of pate in the single currency. Of the three, Europe, Britain included, within the next the UK is in many ways the most impor- 10 years (Chart 2). Opinion polls taken tant, from both a European and U.S. per- since the cash changeover confirm that spective. public sentiment is becoming less hostile. The single currency has been a divi- sive issue in British politics for more Concluding Observations than a decade. Hostility to EMU on the There is an apocryphal story that part of the UK and Denmark was sig- when the initial negotiations for the Euro- nificant enough that both negotiated pean Economic Community were taking

FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH/APRIL 2002 5