Adapting to euro will take patience and practice

Now that Ireland's participation in EMU is official the State joined the club with other first round participants last weekend it seems the right time to try to answer some of the many questions readers have asked about the impact of the single currency on their savings, bank and credit card accounts, retail prices, pensions and other investments.

AIB Bank has produced the first bank newsletter for customers on EMU and, with its permission, Family Money is using it and Eagle Star's excellent EMU investment newsletter as source material.

For Mrs B in Goatstown, her main concern about EMU is what is going to happen to her savings, which are tied up in An Post Savings Certificates and a low DIRT Special Savings Account: "Can I keep my savings in pounds, or will I have to switch them to the new euro currency?" she asks.

EMU is scheduled to begin on January 1st, 1999, but it won't be until January 2002, when euro notes and coins come into circulation, that the Irish currency will disappear from use and we will use euros exclusively. Between January 1999 and January 2002, Irish consumers will continue to be able to use and save in Irish pounds. Euros will only be in use for non-cash transactions, such as credit card transactions and settlements mainly between banks, institutions and companies, though it is expected that people who want to pay utility bills by direct debit or with their credit card, or even their taxes with euros, for example, will be encouraged to do so from an early stage of the transition period. Until January 2002, Mrs B's savings can remain in Irish pounds.

One of the early advantages of being an EMU member is that if you travel to another EMU member country from January 1999 you will be able to make euro credit card purchases from retailers who provide dual pricing of goods, and enjoy a modest saving because you will no longer be charged for foreign currency transactions.

Irish retailers are also expected to bring in dual pricing at some stage during the transition period, though how it will be displayed and transacted has not yet been agreed in the EU. There is a fear that the only solution will be to provide two different cash tills, one designated for Irish pounds purchases and the other for euro purchases. From January 1999 onwards, the main banks will be providing customers with extra account facilities that will show the following: your balance in both Irish pounds and euros; a euro value for each transaction; the fixed conversion rate between the pound and euro. On January 1st, 2002, your account (and all your bank cards, etc) will automatically convert to euro use. Credit cards and ATM cards that can be used in non-EMU countries will convert those currency purchases into euros and apply foreign exchange charges. How much the bank will charge for all this has yet to be determined. Many readers have expressed concern about the conversion rate that will be used to calculate the new euro price of goods and services. People are wondering if goods that were one price one day are suddenly going to be slightly more expensive as retailers and others decide to simply "round up" the cost of goods and take advantage of ordinary people's poor grasp of the mathematical formula that will be used. "It happened when we went metric," recalls Mr McC from Cork, "I'm wondering if it will happen again."

The euro is also based on a decimal system and there will be seven notes worth 5, 10, 20, 50, 100, 200 and 500 euros as well as a 1 and 2 euro coins. Six other euro coins worth 1, 2, 5, 10, 20, 50 cents denominated as 100 cents to the euro will also be issued. The euro sign is a rounded E with two parallel lines running through the middle of the curve. Most people will use the "E" key on their typewriters or computer consols to depict the new symbol until manufacturers adapt keyboards and software programmes to accommodate it.

According to AIB, "If we enter EMU at 1 €0.796244," which is the current value of the ecu to the Irish pound, "then £10 will be worth 12.56 euros and an annual salary of £20,000 will be the equivalent of 25,117.80 euros."

Calculating 12.56 euros to every pound you spend is going to be a bit of a nuisance for a while (investing in a small pocket calculator might not be a bad idea), but eventually everyone will get used to new values and will revert to comparing such prices against other goods or services on the market rather than to old pound values.

What will be made easier is comparing the cost of goods here against those in other EU countries, especially when on holiday. Many commentators believe that being able to directly compare the cost of goods will have an impact on pricing and gradually whittle away major price differences. With both the currency exchange calculation and the cost of foreign exchange transactions gone, manufacturers and distributors in one city or country that set consistently higher charges could lose out to others (in other countries) who do not. Consumers should benefit in the longer term.

It has been recommended by the EU Commission that there be a dual display of values and prices in both currencies for at least six months before and six months after the introduction of euro coins and notes to offset the confusion that people are going to experience as a result of conversion.

They acknowledge that there is a risk that if retailers use what is known as "strategic price bands" when they price goods that is, where they price an item at £6.99 rather than £6.85 (the real cost of the item) because such values are typical in retailing, when the pound value is converted to euros and is found to be, for example, 8.73 euros, the temptation may be to raise the price to 8.99 euros because it keeps with familiar marketing practices.

Whether consumers will accept such price gouging is another matter. Rounding up and down is likely to be much subtler, with just fractions of a euro being added or subtracted, but the overall impact on pricing could still be significant. European consumer groups are already saying that this is more likely to benefit the manufacturers than consumers.

Pricing of goods is under the regulation of the Office of the Director of Consumer Affairs and we understand this issue is already a high priority with that office.

Vending machines, parking meters, toll booth chutes the list is endless of retail units which use rounded values, and all will have to consider a fair way of converting the humble 20p into the more cumbersome euro cent. The banks are also going to have to consider how it rounds up their own charges and what level they set for items such as cheque cards: it seems unlikely that a £100 cheque card limit will become a 79.6244 euro limit. The banks are more likely to round that up to 80 or even 100 euros for the sake of simplicity.

Next week: the impact of EMU and the euro on investments such as equity funds and pensions.