Adopting the euro: economic communication and challenges
Economic and monetary union (EMU) and the single currency are vitally important for promoting growth and jobs in the EU. They are part of the policy framework that supports the EU single market for goods, services, capital and labour that brings opportunities for more trade, more exports and more jobs. The new Member States, the EU-10, are within EMU and participate in the European System of Central Banks while they prepare to adopt the euro and join the euro area. As part of these preparations they are taking measures to achieve sustainable economic convergence with the euro area and meet the formal Maastricht criteria on government deficits and debt, exchange rate stability, inflation and long-term interest rates. Their different economic situations mean they will join in waves, as and when they are ready, in the years to come. Other practical preparations concern the cash changeover (the exchange of national currency cash into euro cash), converting accounting and payment systems, and adapting their IT infrastructures.
In parallel with these policy and administrative preparations, much attention is being given to public information campaigns – and with good reason. In a recent speech to EU-10 changeover coordinators, Joaquín Almunia, European Commissioner for Economic and Monetary Affairs, pointed out that since the introduction of euro cash on 1 January 2002, public opinion polls show that euro-area citizens believe the introduction of euro cash caused price rises; 93% hold this opinion according to a recent survey. This has led to rising public concern in the EU-10– where, on average, 75% of citizens fear price abuses on adopting the euro. In contrast to these public perceptions of euro-related price rises, Eurostat data clearly show that the effect of the earlier euro changeover on prices was negligible. Therefore, there is apparently a gap between the actual inflation rate and people’s perception of inflation. Addressing this ‘perception gap’ and the fears it awakens is one of the major challenges facing the EU-10 governments and administrations as they prepare communications strategies on the euro for their citizens.
Understanding the perception gap
“Preparations for the euro in 2002 included a wide range of measures to ensure a seamless transition for the general public,” says Stefan Pflüger of DG ECFIN. “For example, dual displays of prices in shops in both euro and the national currency helped people to make comparisons. And bank statements displayed amounts both in the national currency and euro well before euro cash appeared. These measures helped citizens make the mental adjustment to thinking in euro, preparing for the day when euro cash appeared in people’s pockets.” However, after the changeover, opinion polls soon showed consumers were convinced that life was more expensive in euro.
Evidence to the contrary came from Eurostat inflation statistics which showed average price inflation remained fairly constant during the introduction of the euro. Only 0.09% to 0.28% at most of the observed 2.3% price inflation could be attributed to the euro, while other unrelated factors, such as new tobacco taxes, extra travel security costs after 9/11, bad weather affecting fruit and vegetable prices, and higher energy prices, all contributed to ‘normal’ inflation. Significantly, inflation rates outside the euro area, in Denmark and the UK, showed similar behaviour for similar reasons.
To investigate people’s concerns, economists turned to Europe-wide consumer surveys of consumer expectations of price inflation and compared these with actual inflation figures. This comparison shows that before the euro introduction, inflation perceptions and actual inflation closely coincided, but when the euro was introduced a clear ‘perception gap’ appeared. Several national studies confirm these findings. A study by the ING bank on the impact of prices in Belgium found that “people have the feeling that prices increased dramatically since the introduction of the euro, whereas real price increases do not confirm this”. Similarly, the Deutsche Bundesbank, after monitoring 18 000 prices, found that “the introduction of the euro did not have a major impact on the cost of living as a whole”. While perceived inflation increased in most Member States, there are differences – the perception gap was low in Finland and Belgium, higher in Greece and Italy. Further, while the gap was at its widest in 2003, in some countries, for example Germany, it now seems to have closed.
Figure 1: Euro area inflation perceptions
|© Commission services|
Figure 2: German inflation perceptions
|© Commission services|
The devil in the details
Subsequent research has revealed the reasons for this perception gap. While overall euro-related price inflation was insignificant, sectoral studies show a ‘grey zone’ of consumer goods and services that did indicate unexplained price rises during the euro changeover. Most of these are in the services sector, including restaurants and cafés, hairdressers and repair and cleaning services. Significantly, these are sectors with little competition – small local shops rather than large retailers – and they are for everyday goods and services that people purchase frequently but which form only a minor part of the cost of living.
National studies confirm this sectoral dependence: a study for Belgian consumer organisations found that while bread, coffee and beer prices rose considerably in the period 1996 to 2005, prices for durable goods, such as electronics and clothing, remained stable or fell. Several studies conclude that the perception gap arises because frequent purchases, for example bread, contribute more to consumer perceptions of inflation than less-frequently purchased items, like a computer. Additional factors, such as the subjective approach of the consumer, the psychological observation that price increases are noticed more than decreases, and the fact that consumers tend to compare 2006 prices to the price in national currency in 2001, are all used to explain the perception gap and its origins.
The need to communicate and monitor
The ‘perception gap’ is believed to explain the concerns with the euro in the current euro area. In hindsight, while the initial introduction of the euro went well, the failure to allay public fears is seen as one of the weakest points of the process, and there is a determination to avoid this in the EU-10 as they prepare for the euro, as Stefan Pflüger explains. “We are holding conferences with EU-10 governments and stakeholders to transfer the good practice from the introduction of the euro and highlight the not-so-good practices. A recent high-level conference in Slovenia included a round-table discussion with speakers from the banking sector, SME representatives and consumer organisations. As well as retailers’ codes of conduct, dual pricing in shops and the merits of ‘fair pricing’ stickers, the participants discussed the crucial role of price monitoring by authorities and consumer organisations – to build confidence among the public and ensure abusive pricing in euro is identified and publicised. Above all, this is about the importance of communication. It is crucial that European citizens in the EU-10 have confidence in the euro and in the changeover process.”