Practical issues arising from the euro May 2002 Bank of England Practical issues arising from the euro Practical issues arising from the euro May 2002 05 FOREWORD 07 SUMMARY 15 PART I: COMPLETION OF THE EURO CHANGEOVER IN PRACTICE 15 The euro area 24 Austria 29 Belgium 34 Finland 38 France 44 Germany 49 Greece 53 Ireland 60Italy 65 Luxembourg 69 The Netherlands 74 Portugal 78 Spain 84 PART II: LESSONS FROM THE EURO CHANGEOVER 84 A: THE ORGANISATION OF THE CHANGEOVER 85 B: THE COMPLETION OF THE NON-CASH CHANGEOVER 86 Box: Lessons from the conversion weekend 87 Accounts 90Payments 92C: THE CASH CHANGEOVER 92 Prior distribution of euro cash 94 Box: Frontloading: payment and collateral 96 Box: Contrasting approaches to sub-frontloading 97 Starter kits 100 Cash at banks 103 Cash at retailers 104 Cash for tickets and vending machines 105 Withdrawal of legacy cash 106 Box: Contrasting approaches to the withdrawal of legacy cash 107 Box: Defacement of legacy banknotes 108 D: COSTS AND BENEFITS OF A QUICK CHANGEOVER 108 The timetable for the changeover 110The pace of the cash changeover 111 Box: Why was the cash changeover quicker in some countries than others? 112 Costs and benefits of a quick cash changeover Practical Issues Arising from the Euro: May 2002 3 114 E: OTHER ISSUES 114 The prevention of criminal activity 116 The information campaign 117 The attitude of the public 118 The impact on prices 119 Box: Euro-area HICP: evidence of euro changeover effects 120Changeover costs and charges 124 PART III: LESSONS FOR THE UK 124 A: SIMILARITIES AND DIFFERENCES BETWEEN THE UK AND THE FIRST WAVE 124 Similarities between the UK and the first wave 125 Differences between the UK and the first wave 125 Box: Steps in a UK changeover 128 B: LESSONS FROM THE FIRST WAVE 128 Box: Lessons from decimalisation 129 The overall framework for a UK changeover 132 The mass changeover in the UK 133 Box: Banking services in euro under a phased approach 136 Box: The securities changeover for small investors in the UK 138 The UK cash changeover 139 Box: Cash distribution in the UK 145 Other aspects of a UK changeover 147 Annex A: Preparing the Bank of England for possible UK entry 149 Annex B: Changeover in sterling financial markets 153 C: USE OF THE EURO IN THE UK OUTSIDE FINANCIAL MARKETS 153 Use of the euro by businesses 155 Use of the euro on the high street 155 Northern Ireland 156 Some internet addresses Cartoons by Basil Hone 4 Practical Issues Arising from the Euro: May 2002 FOREWORD 1 The changeover to the euro from the first 12 participant currencies was completed earlier this year, with the introduction of euro notes and coin, after a three-year period in which the euro was only a ‘virtual’ currency. The final changeover required extensive prior preparation and was executed almost immaculately across the euro area. The result was better than anyone in the euro area dared hope, and reflected admirably on all those involved, from the authorities to the general public. 2 As a potential subsequent entrant, the UK can learn much from the first-wave experience. That is why in previous editions of Practical Issues, before the event, we set out the way in which the final changeover was being prepared, the issues that were arising, and how they were being addressed, in different ways in different countries. This new edition, the seventeenth, completes this particular exercise by describing, after the event, how the changeover worked out in practice, in some detail. 3 So, in Part I, the evidence is set out, first from a euro-area wide perspective and then for each euro-area country. Part II goes beyond this to analyse the lessons to be learnt from the participating central and commercial banks themselves, both about what went perfectly as well as the areas which proved somewhat more problematic. It draws on the invaluable discussions we have had both with euro-area authorities and commercial banks, for which we are enormously grateful: we have taken full advantage of this unique opportunity, before the memories of those directly involved inevitably fade. And Part III considers what we in the UK might learn from the whole experience for a prospective changeover here, if the Government, Parliament and the people decide on euro entry. 4 Given the extensive coverage of the changeover in this edition, we have had no room to include some of the other ground which we have typically covered previously, like the latest position on the evolving euro financial markets and the supporting infrastructure; but another Practical Issues is planned towards the end of this year. 5 A personal postscript from John Townend Given my imminent retirement from the Bank, this is the final edition of Practical Issues for which I shall be responsible. I would like to thank all those who have contributed to its success over the past six years, particularly all those outside the Bank, whether in London or across the euro area and whether in central banks, ministries or the private sector, who have made possible such an authoritative document. It has been, in my view, a model of co-operation between the Bank of England and the European financial community. 6 From now on, comments on Practical Issues should be addressed to my successor, Bill Allen, Director for Europe, Bank of England, Threadneedle Street, London EC2R 8AH (fax no: 020-7601 4404; e-mail: [email protected] ). Practical Issues is available in hard copy from the Bank’s Public Enquiries Group (tel no: 020-7601 4012; fax no: 020-7601 5460); and on the Bank’s website (www.bankofengland.co.uk), including, in some previous editions, limited additional material. 5Practical Issues Arising from the Euro: May 2002 5Practical In this edition of Practical Issues, references to calendar months September, October, November or December are to 2001, and January or February to 2002, unless otherwise stated. 6 Practical Issues Arising from the Euro: May 2002 SUMMARY 1 The completion of the euro changeover provides an opportunity that will not recur to learn from the experience of the first wave, and to draw lessons in case the UK joins EMU as a later entrant. This edition of Practical Issues focuses exclusively on the completion of the changeover: how it worked in practice; what lessons can be drawn from central and commercial banks in the euro area; and to what extent they would apply in the UK, bearing in mind that the UK position would differ from first-wave countries in a number of respects. 2 The completion of the euro changeover was a technical success greater than anyone could have anticipated, sufficiently so that it even stopped being a media event after the first few days in January. Success could, however, by no means be taken for granted. The changeover was a huge and complex exercise. In order to learn the lessons, we have investigated the changeover in detail. We are very grateful to the ECB, our counterpart national central banks and also many commercial banks in the euro area for the unfailing help they have given us in undertaking this exercise. We could not have done so without them. The euro changeover Organisation 3 While the whole changeover was overseen at European level by ECOFIN, and the ECB played a major role in organising the cash changeover, it was organised in detail and implemented at national level, through national changeover committees, and led by national governments. National central banks played a key role in organising the cash changeover, and also in monitoring or assisting preparations in the financial sector. Meticulous preparations were required from an early stage. All the key parties – governments, central banks, commercial banks, cash-in-transit (CIT) companies, retailers and the cash-operated industry – had to play the roles expected of them, with effective co-ordination between them and adequate channels for resolving urgent problems when they arose. Completion of the non-cash changeover 4 The completion of the euro changeover involved the mass conversion of bank accounts by the end of last year, followed by the introduction of euro – and withdrawal of outstanding legacy – cash from the beginning of this year. Individual banks were responsible for their own preparations for the 7Practical Issues Arising from the Euro: May 2002 7Practical changeover of all their customer accounts and contracts, with co-ordination by the authorities in some countries. To undertake the entire non-cash changeover during the final weekend was too risky for the largest banks. So they staggered the conversion of their customer accounts in the run-up to the end of last year. The conversion of personal accounts was less complex, both for banks themselves and their account holders, than the conversion of business accounts. Many large businesses needed to be treated individually. With hindsight, it was not necessary – though it may still have been cost-effective – to complete the mass payment infrastructure by the beginning of 1999, as there was little use of the euro outside financial markets until last year. The cash changeover 5 The authorities’ objective was that cash transactions should be conducted only in euro as quickly as possible in the New Year, so as to help minimise costs (for banks and retailers) and minimise confusion amongst the public. There were four key steps in achieving this: prior distribution of sufficient euro cash, through frontloading; early adaptation of ATMs; use of low-denomination notes; and a swift response from the public. 6 First, frontloading of banks and sub-frontloading of many retailers contributed to a quick cash changeover, with coin being frontloaded first because of its bulk, and notes later because of their much greater value and associated security needs.