COMMENTARY

Spring 2007

by Thomas Eife

RELATED ARTICLES:

---

The discrepancy between popular impressions of how the 2002 changeover to the euro affected prices and its actual impact has perhaps been the most surprising consequence of the single currency’s introduction. Giancarlo Corsetti rightly points out that misperceptions of this kind may even have an adverse effect on a country’s economy, while for those countries intending to join the eurozone the challenge will be to avoid repeats of the same phenomenon.

Corsetti’s article touches on two different issues; the first is the actual impact on prices of the euro, and the second is its perceived impact. Regarding the actual impact, Corsetti is correct when he says that the effect of the switchover on overall price levels has been negligible. Only in certain sub-sectors, like restaurants has there been some measurable impact. This apparently explains why restaurant prices have so often been at the centre of public discussion. Here, two clarifications need to be made.

First, the inflationary impact was small; too small to explain the public outcry. In the case of restaurant prices, the data show a sudden increase of about 3% within the four weeks around the changeover. Statistically, an increase of this size is quite unusual which suggests that the euro’s physical introduction did indeed trigger the price rise. But an increase in the price of a cup of coffee from, say, €1.00 to around €1.03 can hardly explain so loud a public outcry.

Second, the impact on restaurant prices – and on prices in general – can only be found in about half of the 12 eurozone countries. Those countries that avoided the impact were the ones that required companies and retail outlets to “double price” by displaying price tags in both euros and the legacy currency. Yet curiously enough, people in countries with mandatory double pricing complained about rising prices just as much as people in the other countries. This suggests that the actual impact should be seen as independent of the perceived impact.

Regarding the perceived impact, I would take a different stand to Corsetti. Though I agree that the arguments advanced to explain people’s perceptions appear reasonable, they also give the impression that this is a phenomenon that policymakers cannot do much about, and is therefore an unavoidable side-effect of a currency changeover. In my view, whatever the reason for the perceived impact, people are mistaken in their perception so there must exist a policy solution that could prevent people from getting this false impression.

Research shows that wrong perceptions can be avoided with better communication. One of several mistakes made during the euro’s introduction was to allow the media the leadership role in informing the public on its impact. Media reports were often unbalanced and based on small and sometimes biased samples. What was missing were clear statements from national statistical offices about what was really happening to prices. Given the size of their data bases, it would not have been very difficult for the statistical offices to dominate the discussion and reduce the misperceptions.

In short, many of the problems that surfaced during the 2002 changeover could have been avoided. Policymakers have effective instruments at hand to prevent there being an actual impact on prices, and even the small price movements observed in 2002 were unnecessary and can be avoided in future. As to the perceived impact, which is undoubtedly the more severe problem, that should be viewed as a policy problem and not as an unavoidable side-effect of currency changeovers.