The Euro Emerges

by Teresa Acklin
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Europe's new single currency makes a slow start.

By Diane Montague, European correspondent

   Use of the euro, Europe's new single currency, has been lower than hoped, according to reports coming from Brussels in mid-February. Corporate and institutional financial dealings have moved over to the new currency on a large scale. Small-scale businesses and individuals, however, who have the option to use the euro or their own national currencies for credit card and check transactions are so far reluctant to make the switch.

   The new currency situation also is causing problems in grain trading for the four countries that have not yet joined the single currency system.

   The reason for the slow uptake by small businesses and individuals is thought to be the level of charges still being levied by European banks. One of the advantages of the euro was intended to be a substantial cut in the cost of currency transactions. When this did not occur, the European Commission launched raids on eight of the E.U.'s leading banks on suspicion that they were conspiring to fix charges on currency transactions and on reports that some banks were refusing to accept checks in euros. The Commission is to investigate the possibility of a cartel between the banks in these areas.

   In terms of the wide-ranging and complex changes made in the financial arrangements of the 15 member states, however, the change went smoothly.

   The euro — son of the Ecu — was born quietly and with few complications on Jan. 1, 1999. Years of careful planning by banks and financial institutions of the 15 member states of the European Union ensured that the launch of the single currency was achieved smoothly and efficiently.

   The exchange rates of 11 European countries were fixed for all time against the euro on Dec. 31, 1998. Their values, along with the pound sterling, were used to calculate the value of the euro on Jan. 1, 1999 (see World Grain, November 1998, page 18). Over the first four days of the New Year weekend, the financial institutions worked to adapt their systems to handle the new currency.

   The 11 countries making up “Euroland” are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. Four countries — Denmark, Greece, Sweden and the United Kingdom — have remained outside for political and economic reasons, but may join at a later date.

   The 11 Euroland countries will have the option to use the euro or to continue to use national currencies for personal finance, customer and retail trade until 2002, but all institutional business is now carried out in euros and commercial trading is being done in both. Cash transactions will continue to be in national currencies until 2002.

   In the first few days after the launch, stock markets around the world reacted favorably to the change. The new currency held up well against the U.S. dollar, but has since started to slide. Between early January and mid-February, the euro lost 6c in value against the dollar, mainly because interest rates in the euro zone are running at a level of only around 3%. This is more than 1% below the expected interest rate of only a few months earlier.

      CONSIDERABLE IMPACT.

   Despite its quiet introduction, the impact of the euro on the economies of the 11 states is expected to be considerable. It is expected to lead to lower prices throughout the region because it will be so much simpler to compare the differences between one country and another.

   The cost of cross-border trading is expected to be cheaper despite the early problems being investigated by the European Commission because there are no longer the complications and costs of currency adjustments. Companies will be able to market products on a wide scale and there will be incentives for more mergers and takeovers, which are expected to lead to greater efficiencies.

   The biggest change for agriculture for all countries, both in Euroland and outside, has been the simplification of the support price arrangements by the abolition of the green rates. These were devised to protect farm incomes from fluctuations in national currencies against farm support prices fixed at the beginning of each marketing year. If a currency strengthened against the central green rate, farmers were protected from a fall in support prices by an adjustment to the national currency's green rate.

   The green rate system was abolished on Jan. 1, 1999. In the 11 Euroland countries, intervention prices and direct income support payments are now set in euros. Since the currency values of the individual countries are fixed permanently against the euro, they will only change when the value of the euro changes.

   This is in direct contrast to the four non-member countries where fluctuating exchange rates will affect intervention prices on a day-to-day basis, which will in turn make markets more volatile. Intervention prices are converted from euros into national currencies in the four non-member states using the real market exchange rate on each day. At present, it is proposed that direct income support payments will be calculated on the real market exchange rate on the last day of the old marketing year. In the case of cereals, this will be June 30, 1999. However, some states are pressing for an average rate to be applied to avoid fixing a rate at an exceptionally high or low level.

   Farmers will be compensated for the loss of the old green rate protection if their national currency strengthens against the euro by more than 0.5% during a marketing year. The funding will be provided in full by the E.U. in the first year and by a reducing amount over the next two years before being phased out.

      PROBLEMS FOR GRAIN TRADE.

   The changes have caused particular problems for the grain trade in the four non-euro countries in terms of intervention. This is because intervention prices can change from day to day, and the price paid for grain sold into intervention is fixed on the day before delivery and not the day on which the grain is sold.

   Since there can be a 10-day gap between the sale and delivery, the chance of a change in the exchange rate is considerable. This has been particularly important at the beginning of 1999 with grain prices at such low levels and intervention becoming an important factor in the market.

   As a large-scale grain trader and exporter, the United Kingdom has been badly affected. The situation has been made worse by the strength of the pound against the euro, which is making exports uncompetitive.

   One U.K.-based trader said, “If you don't join the club, you don't get the benefits. As far as the U.K. grain trade is concerned, the euro so far is a pain in the neck.”

Euro exchange rates

Fixed euro rate for Euroland currencies on Jan. 1, 1999
1 euro = 40.3399 Belgian franc
1.95583 German mark
166.386 Spanish peseta
6.55957 French franc
0.787564 Irish punt
1936.27 Italian lira
40.3399 Luxembourg franc
2.20371 Dutch florin
Variable daily euro rate for non-Euroland currencies
Jan. 4Jan. 5 Jan. 6 Jan. 7Jan. 8
1 euro =
U.K. pound0.71110.71220.70760.705850.70940
Danish krone7.45017.44957.44527.44317.4433
Greek drachma327.15324.7324.72324.40324.00
Swedish krona9.46969.40259.3059.18009.1650
U.S. dollar1.17331.17911.17431.16321.1659
U.K. intervention price in sterling (Jan. price = 122.19 euros)
£86.69£86.69£87.02£86.46£86.25
Also included above are the daily euro rates for sterling and other non-Euroland currencies during the first week of introduction. The first January intervention price based on the daily euro rate was set at £86.89. This was nearly £1.60 per tonne higher than if the old “green rate” had been used. The weakening of the pound against the euro in the first two days — from £1 = 1.4063 euros to £1 = 1.4041 euros — caused a further rise in cereal intervention price. On the final two days of the week, sterling strengthened against the euro and the intervention price fell back.
Source: European Central Bank

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