Birth of the euro

Many Saga readers will feel one big advantage of the euro as soon as they leave the UK. The notes and coins you found in your pockets after that trip to Spain will be just as welcome as far afield as Finland or Greece or as close to home as Dublin or Calais. Indeed the euro is accepted in 30 states and territories around the world - click here for a full guide.

Apart from the 12 European Union members in the eurozone, it is also used in four tiny European countries that used to use francs, lire or pesetas – Andorra, Monaco, San Marino, and Vatican City. Liechtenstein is keeping the Swiss franc. Kosovo and Montenegro in the former Yugoslavia have also adopted the euro.

But it does not end there. Seven French overseas departments and territories, all the holiday islands belonging to Spain and Portugal and five overseas Spanish territories in Morocco now also use the euro. You could fly west to the coast of Canada, south to the Caribbean, on to South America, back across the Atlantic to the Canaries off the north-west coast of Africa, right across that continent to islands in the Indian Ocean and back to the former Yugoslavia and spend nothing but euro. And that means saving time and money by cutting out those trips to the bureau de change. Once you have euro, keep them to spend next time you visit the eurozone.

That does not solve the problem of those francs, pesetas, drachmas, and lire in that old tin box in the wardrobe. It is too late to spend them now but there are three choices.

· If you are going to visit the country in 2002, take them with you and change them in a bank. Most banks in most of the eurozone countries will change old currencies, including coins, into euro until the end of 2002. Many will accept them for longer. Banks should not charge, though bureaux de change may do so.

· You can change old currency notes – but not coins – in many banks and bureaux de change here in the UK, right up to the end of 2002. But if you change them direct into euro, you may find they are converted into Sterling first and then back into euro! That means two lots of charges. Some, such as the Post Office bureaux de change, do not do this and offer a better deal. Shop around. Some banks offer cheaper rates to their own customers.

· You can give the coins, and of course any notes, to charity. Most banks and building societies have an arrangement with a particular charity and have boxes to collect foreign currency in their branches. Alternatively, most major museums, galleries, and churches welcome foreign currency gifts.

Throughout the eurozone there have been fears that prices would rise when the currency changed. And there is some evidence of price creep. In Florence for example one tourist attraction which charged 11,000 lire at the end of December moved to €6 on January 1. As 11000 lire is €5.68, that is a five and half percent rise under the guise of ‘rounding’. And at some stage it is inevitable – prices will have to be rounded off to what retailers call ‘price points’. No-one is going to sell goods at €17.13 euro. Eventually they will be changed to a round figure – or one ending in .99 or .95. Readers of Saga Magazine will find all this very familiar. When we decimalised our currency in 1971, prices did creep up.

But it is also claimed that having one currency across Europe will make price comparisons easier and that should increase competition and drive down prices.

Even if you have property or other financial commitments in a eurozone country it is probably not worth opening a euro bank account. Most High Street banks in the UK offer euro accounts, just as they do dollar and other foreign currency accounts, but charges are high, conditions strict, and interest negligible. Most bills in Europe can be paid by a direct transfer – you just give your bank the name and account details of the person you want to receive the payment. The charges to do that from a UK bank to one in the eurozone are high - £5 to £10 a time. But are not significantly lower from a euro account than from an account in Sterling. The only people who should seriously consider opening a euro account are those with a euro income. Then it is a lot cheaper to have an account in euro which can receive and pay out euro without converting to Sterling. However, people who have a second home in the eurozone may find it convenient to open an account in a bank in that country. It will of course be in euro.

Although interest rates are lower in the eurozone you should not try to take advantage of them by borrowing money in euro. There are two reasons. First, competition in the UK is so strong that mortgages and loans are often cheaper here than from eurozone banks. Second, you run the risk that that the euro will strengthen against the pound, making your debt bigger. For investing and borrowing the euro is just another foreign currency – treat it with great caution.

Only three countries are in the European Union but not in the euro – Denmark, Sweden and the UK. All three could have a referendum on joining in 2003.

Denmark is the only country that has already allowed its citizens to vote directly on joining the euro. On 28 September 2000 they voted by 53:47 to keep the krone. However, the new Danish Government said in January this year that there would be another vote on joining the single currency in 2003. A recent opinion poll, taken after the introduction of the euro notes and coins, showed that 57% were now in favour of joining.

The Swedish Prime Minister Goran Pearsson said in January that a vote on the euro could be held in Spring 2003 and that if the people vote ‘yes’ the notes and coins could be in use by 2006. Public opinion in Sweden was strongly against the euro, but that has changed over the last year and one recent poll showed a tiny majority in favour of joining.

The UK may also hold a referendum on the euro next year. The Prime Minister has said that in principle his Government supports joining the single currency – but only when the economic conditions are right. In 1997 Chancellor Gordon Brown set out five economic tests which had to be passed before he would agree to join. The Government is committed to making a decision on those five tests by June 2003. They are

· Are the economies of the eurozone and the UK converging? – not at the moment. Inflation is much lower in the UK and our rate of growth is higher.

· Is there sufficient flexibility to cope with economic change? This is at the heart of the problem. In the eurozone the European Central Bank fixes one interest rate for the whole zone. That makes it hard for individual countries to retain their own flexibility to deal with economic crises.

· Will joining increase investment by businesses in the UK? Businesses in the UK are divided. Some passionately want us to join, others are clearly against.

· Can our financial services industry cope with the change and prosper under it? The UK has one of the best developed financial services industries in the world. It will cope and prosper under almost any circumstances.

· Will joining the euro be good for employment? At present our rate of unemployment is far lower than that in the eurozone. Those in favour of joining say it will create jobs; those against disagree.

Of course, the Government could decide in June next year that the tests have not been met and postpone the decision still further, probably until after the next General Election. But if it decides that we have met the tests, a timetable for joining has already been worked out. The Treasury has a Standing Committee on Euro Preparations which says that within four months of the decision there would be a referendum. So we could be voting in October 2003. If the vote is ‘yes’ then we would join the euro in two years and the notes and coins would circulate shortly after that. In other words, if the Government asks and if we say yes, we could be using the euro in early 2006.

But those are two big ‘ifs’. The Chancellor shows no sign of wanting to lose his independence to run the UK economy as he wants. And opinion polls in the UK consistently show a clear majority against joining the euro.

the Government euro site

Treasury information on the euro with lots of other links

 The ‘no’ campaign

 The ‘yes’ campaign

Complete guide to where the euro is used

March 2002

e-mail Paul Lewis on paul@paullewis.co.uk