Tuesday, February 10, 2004

The costs of a single currency: false bank notes and slower payments

Newspaper de Volkskrant informs us that the central bank will start an awareness campaign for consumers. As a result consumers will be encouraged to take our time to check whether or not a bank note is false. Of course this is a good thing to do. But why not take a step back and muse about the (hidden) costs and benefits of the physical currency.

The introduction of the physical euro has been quite an expensive political endeavour. The monetary benefits of the physical bank note for the capital market are zero (as the euro was already used as an accounting and payments unit). There are however some benefits for Europeans when they travel. Yet let me explain why the physical Euro, in practice, is a serious loss maker.

1. We had to replace all EU bank notes before their economic lifespan had ended. This is costly and, as stated before, only gave Europeans a slight benefit (not having to change money when travelling).

2. The coins were designed at a designers table but are highly impractical. The result of giving the 1, 2 and 5 cents and 10, 20 and 50 cents the same colour is that longer time is required for payment in shops. The economic costs involved are considerable: the payment process at retailers takes more time to both consumer and retailer and thus costs more.

3. All Point of Sale systems needed to be upgraded to start working with the euro instead of the local currency. Again: a lot of costs, without gains.

4. The collectively designed bank notes can -for cost and negotiation reasons- never be as safe as the previously safest bank notes (presumably Dutch/German). So while for some countries the new bank notes are safer than before, for others they are more insecure. In the Netherlands the result is that we have higher costs related to having more false bank notes around.

I think it would be a good thing for the European tax payer if, the next time we do this single currency thing again, we would also endeavour on a rational calculation with respect to costs and benefits.

And it would definitely be the 'royal gesture' if the Dutch central bank takes its responsibility by partly compensating retailers for the extra costs incurred as a result of having brought into circulation bank notes that are less safe than the old one.