Treasury Today Country Profiles in association with Citi

The introduction of Euro notes and coin

With the introduction of Euro notes and coins now less than a year away, there remains significant uncertainty over how the process of transition will work. Despite the existence of the Euro as a currency since 1st January 1999, it is the introduction of notes and coin at the end of this year that will be seen by many as the final stage in the launch of the currency.

What has happened so far?

The European Union’s single currency was launched on 1st January 1999. Eleven of the fifteen EU member states joined the currency at that stage. The eleven countries were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Greece joined on 1st January 2001 as its economy did not meet the convergence criteria in 1999. The remaining three countries – Denmark, Sweden and the UK – opted out of the single currency – none of these three countries have a timetable for entry.

The electronic currency

In January 1999, the eleven countries had their currencies irrevocably fixed against each other, as did Greece when it joined at the beginning of this year. The exchange rates between the legacy currencies were fixed at the rates shown in the table below.

Euro
Austria 13.7603
Belgium 40.3399
France 6.55957
Finland 5.94573
Germany 1.95583
Greece 340.750
Ireland 0.787564
Italy 1936.27
Luxembourg 40.3399
Netherlands 2.20371
Portugal 200.482
Spain 166.386

Significant changes already

The introduction of the single currency in January 1999 and the European Central Bank’s (ECB) assumption of responsibility for the setting of interest rates in the eurozone required the introduction of a new regime of payment systems so that euro-denominated transactions could be handled. All EU countries have a Real Time Gross Settlement (RTGS) system, which links into the ECB’s TARGET system (see Treasury Today February 2000). In addition, the Euro Banking Association’s (EBA) Euro1 system also handles high value euro payments.

Most large multinational companies operating in Europe rationalised their European cash management systems once pooling in euros became possible. Some companies, for example Siemens, changed their internal accounting systems over to euros. Some also insisted that their suppliers invoice them in euros too.

Therefore, despite a lack of notes and coin to date, it is clear that the euro as a currency already exists. The introduction of physical notes and coin is the final, and most visible, stage in the introduction of the single European currency.

Need for publicity

The changeover process to euro notes and coin is one of the biggest logistical problems in Europe. There is a remarkable lack of knowledge and understanding of the process. The European Central Bank is to launch an advertising campaign in September this year to focus on the new notes and coin. This campaign will have four messages:

  1. The features of the notes and coin.
  2. Security features.

    These will be announced in September 2001 but must be disseminated to the public to have confidence in the monetary issue and allow them to recognise fraudulent notes.

  3. Size denominations.

    For many countries, the value of the euro is such that completely new size denominations of notes and coin will be used. The biggest change will be seen in Italy where 1 euro is worth 1936 Lira.

  4. Overall changeover modalities.

    The ECB will also be keen to explain to both the general public and to small businesses how the changeover period will happen.

Details of the transition

Although the focus of this transition period is the introduction of euro notes and coin, there are a number of other changes that also need to take place to allow the new single currency to operate properly. These include changes that consumers will see (these are mainly the introduction of the notes and coin and the changeover of bank accounts into euro) and also changes that will only be noticed by the wholesale markets (primarily the operation of the payment systems).

Bank accounts change

Aside from the introduction of notes and coin, the other main change that consumers and companies will see is the redenomination of their bank accounts into euro accounts. In all countries in the eurozone, it has been possible to convert accounts into euros (or to open euro accounts) from 1st January 1999. Whilst a small number of account holders have chosen this option, the overwhelming majority still hold legacy currency accounts.

Table A shows planned transitional arrangements in all member countries. The European Commission has recommended that banks convert accounts gradually in the third quarter of this year. In most cases customers will be assumed to have given ‘tacit assent’ if they do not reply to any letter from the bank stating that their accounts will be redenominated. Table A provides only the general approach in each member state – individual banks may follow different routes.

Table A

Arrangements before 31st December 2001 Events on 31st December 2001
Austria Accounts converted at request of customers. Any remaining accounts will be converted. This is expected to be the majority of accounts.
Belgium Accounts will be converted gradually from 1st July, although customers will be informed in advance. All accounts should have been converted by yearend. Advice will be shown in both euro and BEF.
Finland Accounts converted at request of customers. Any remaining accounts will be converted. This is expected to be the majority of accounts.
France Accounts will be converted gradually from 1st July, although customers will be informed in advance. All accounts should have been converted by yearend.
Germany Accounts converted at request of customers. Any remaining accounts will be converted. This is expected to be the majority of accounts.
Greece Accounts converted at request of customers. Any remaining accounts will be converted. This is expected to be the majority of accounts.
Ireland Accounts converted at request of customers. Any remaining accounts will be converted. This is expected to be the majority of accounts.
Italy Accounts will be gradually converted from 1st July – although banks will need explicit consent of customers. Uncertain. Italian law does not permit the ‘tacit assent’ approval for changeover, so Italian authorities will be launching a major publicity campaign to persuade account holders to request change.
Luxembourg Plan for transition between 1st July and 1st October. Transition should be completed.
Netherlands No real plans. Major conversion of accounts planned by banks.
Portugal Gradual conversion by banks. All accounts should have been converted by yearend.
Spain Accounts converted at request of customers. Any remaining accounts will be converted. This is expected to be the majority of accounts.

Once the new notes and coin are introduced, legacy currency will cease to be legal tender. The table below indicates when legacy currency ceases to be legal tender and the date at which commercial banks will cease to accept them.

This table shows that member states are confident of having euro notes and coin in circulation by the end of February 2002 – with some countries choosing an earlier date. In order to ensure that notes and coin is available in sufficient volumes, the European Central Bank and the National Central Banks are organising a process of frontloading and front sub-loading (in other words distributing notes and coin to) commercial banks, post offices, cash-intransit companies, vending machine companies and retailers before it is required. Whilst the picture is different from country to country, coin will start to be distributed from 1st September and notes from the beginning of November.

The general public will also be provided with starter kits containing only coin from the middle of December. ATMs will also dispense euro notes from 1st January 2002, although in some countries (Finland, France, Greece and Spain) it will be up to two weeks before all ATMs dispense only euros.

Table B

Legacy legal tender until Commercial banks accept currency until
Austria 28 February 2002 Undecided
Belgium 28 February 2002 31 December 2002
Finland 28 February 2002 At banks’ discretion
France 17 February 2002 30 June 2002
Germany 31 December 2001 28 February 2002
Greece 28 February 2002 Undecided
Ireland 09 February 2002 30 June 2002
Italy 28 February 2002 Undecided
Luxembourg 28 February 2002 30 June 2002
Netherlands 28 January 2002 31 December 2002
Portugal 28 February 2002 30 June 2002
Spain 28 February 2002 30 June 2002

Potential problems

With the complexity of the process illustrated above, there are a number of potential problems. The most noticeable of these are the following:

  • Lack of legacy currency in lead up to changeover. With no more notes being printed and or coins minted, there is already some concern over whether there will be enough notes and coins in the legacy currencies to last to the end of the year. The Irish Republic has already reported a shortage of the smallest denomination coins.

  • Lack of access to new currency at the beginning of 2001. This will be a particular issue for retail outlets, which will see significant demand for small denomination notes and also coins.

  • Queuing in retail outlets. A lack of familiarity with the new notes and coins is expected to lead to significant queuing at certain retail outlets – rail and other travellers are among those likely to be affected.

  • Vending machines will also need to be adapted or replaced to handle the new currency.

Next month in Treasury Today, we will explain what the changeover process means for companies that want to make and receive electronic and paper payments.

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