Bell tolls for euro-zone currencies

Euro notes go into circulation next year Keystone Archive

It's almost the end of the road for 12 of Europe's currencies. From the beginning of next year, euro notes and coins will finally replace those of the euro-zone nations. What effect the launch will have was the subject recently of a discussion organised by Credit Suisse.

This content was published on June 8, 2001 - 11:11

The euro was actually launched at the beginning of 1999 and each member's currency effectively ceased to exist then as they joined at a fixed rate. The markets have been trading euros for two and a half years but on the streets of Europe people have continued to use familiar banknotes and coins.

That all changes next year when 15 billion new euro notes and 50 billion euro coins go into circulation. The notes look the same throughout the euro-zone. The fronts of the coins will also be the same but each country has its own design on the back.

It will be a huge changeover and the currency will be delivered to banks across Europe from September. The launch of the euro has been a huge challenge for its members and the new currency has taken a battering on the foreign exchange markets.

"The euro is a stable currency if you look at its internal value," says Anja Hochberg, a senior economist at Credit Suisse, "It's also a reference currency on the international capital markets but on the other hand, it has lost 20 per cent of its value against the dollar."

Many analysts say the euro's steady decline against the dollar says more about the US unit's strength than any inherent euro weakness. Some argue that the single European currency deserves a higher exchange rate against the greenback than its current $0.86.

"If you look at purchasing power parity, a rate of 80 to 90 cents is probably right for investment products. But if you look at consumer goods then you reach a figure of around $1.10," says Hochberg.

The conversion next year is expected to bring some volatility to the exchange rate markets as Europe's new currency beds down. But analysts say any effects are likely to be short term only.

"We expect a slightly higher volatility around the conversion date," Hochberg says. "But there won't be much effect on the long-term value of the euro. It will attract more attention, though, when it stops being a virtual currency."

The euro has depreciated only slightly against the Swiss franc since its launch but Hochberg expects money to flow into Switzerland around the conversion date as investors hedge their bets.

"The Swiss franc remains a highly regarded international currency. We expect it to appreciate around the conversion date because of its safe haven status."

For the man in the street the launch of the euro in 1999 brought little inconvenience but the launch of euro coins and notes will be an altogether different affair.

Banks are advising people to use up their national currencies or to change notes at the latest by the end of February next year. Credit cards should be now be used on trips to the euro-zone and any accounts held in euro-zone national currencies have to be changed over by the end of the year.

by Michael Hollingdale

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