Adjusting to a different era as new year brings new currency


For most of us, yesterday was a day like the day before. Nothing changed in our lives except the year. The money in our pockets and in our bank accounts has been the same for the past 28 years. Moreover the rate of exchange between our money and that of other countries is today much the same as Thursday's.

But there has been a huge, hidden transformation. For not only have the rates at which we change money with 10 other European countries been permanently fixed but there is much more to this development that is scarcely visible at this stage.

Our currency has become a temporary token for something which came into existence at midnight on Thursday night. And while our coins and notes will remain in e the moment, "big money" will EUROs.

Yesterday was a bank holiday throughout the world, so the weekend allows three days during which to convert this "big money" into euros before the world's banks and foreign exchanges open on Monday - nine to 12 hours earlier than here due to the time difference between Europe and the Western Pacific and Japan.

The first most us will see of the euro will be the gradual introduction of dual pricing in some shops. Though not required until three years hence, some retailers may begin to display much earlier to help us get used to the new currency.

For people in the street there are two main advantages to this currency revolution, one of which - a single denomination for all transactions here and in 10 of our neighbouring countries - will not come about until early 2002, when the euro replaces all 11 currencies.

The other is, of course, the halving of interest rates. This, while bad for savers, will encourage economic growth and, in our case, has started to curb the impact of the huge increase in house prices of the past few years.

For our economy there might theoretically have been a better time for such a fall in interest rates: earlier or later it might have helped us to recover from a recession, instead of boosting an already very high growth rate. But the dangers of the euro's timing for us have been softened by slower growth in much of the rest of the world. Because of this, despite the stimulating effects of reduced interest rates, our growth rate looks like being cut from about 8 per cent a year to 56 per cent - which is what we need.

For, paradoxically, a high growth rate creates a risk of overheating and of inflationary pressures and thus inhibits the government from improving public services and anti-poverty measures and cutting taxes on the scale that our budgetary surplus might otherwise justify. Next year's Budget can now be more generous in these respects if our growth rate is cut to 56 per cent - a rate of growth that would still be more than twice that likely to be achieved by the rest of Europe in 1999.

So the misfortune of others may turn out to be our good fortune, helping to ensure that a fall in interest rates will cushion the impact of slower external growth, rather than spark off inflation here. And if there is a recession, the drop in interest rates here should help to cushion us from the worst effects.

Regarding the interest rate fall and the rise in house prices, an example may be helpful. The full impact of the last drop in interest rates has still to be carried through by some lending agencies, but when this is completed, variable rate mortgages are likely to be available, from the EBS for example, at as little as 5.1 per cent - as against the recent 7.1 per cent.

Someone who bought a dwelling for £117,500 on an 8.5 per cent variable rate mortgage over a 25-year period last summer would have had annual repayments of about £7,850. With the 5.1 per cent interest rate, this comes to just below £6,500 a year - a reduction of over one-sixth.

In other words, for the same deposit of £17,500 and the same repayments required last summer to buy a £117,500 dwelling, a house-buyer could now afford a dwelling costing £142,000 - covering an increase of about 21 per cent in the house price. That represents a significant mitigation of the adverse effects of rocketing house prices.

So much for the initial impact on our economy and on housebuyers of what might be described as today's theoretical euro. But in three years it will be a reality for everyone. At that point there will be a certain nostalgia for our familiar pounds and pennies. - disappeared in 1971.

But from January 1st, 2002 the new notes, printed at European level, and the new coins, minted locally, will be available, running in parallel for a period with the pound. For how long?

The two could run in tandem for up to six months, but in practice the overlap period is likely to be much shorter, for the sooner we start working with one currency rather than two, the better.

I've written here before about the widespread belief that prices were inflated when our currency was decimalised in 1971. This is a complete myth.

The rate of price increases during that quarter of that year was fully in line with increases in the immediately preceding and following quarters. And, when one examines the prices of individual products as measured by the Central Statistics Office, the increases were in respect of products not susceptible to this kind of adjustment.

So fears that prices may be jacked up as we change to the euro in early 2002 are unrealistic - all the more so because there will be dual pricing for a period, with strict control over the conversion rate between the two currencies.

What kind of a currency will the euro be? A "hard" currency, it appears. It will hold its own vis-a-vis the dollar and the yen. And this is not merely because the European Central Bank will want to secure that outcome. Another factor is that the use of the dollar as a reserve currency and medium of exchange has until now been artificially enhanced by the absence of any comparable currency.

Thus in Russia and in countries such as Kazakhstan, the dollar has perversely been the primary foreign currency, even though the US neither invests in, trades with, nor gives aid to these countries on anything like the same scale as western Europe. Once there is a European currency on a scale comparable to the dollar, this artificial situation is likely to change.

And the same is also true in some measure of the Far East, where America dominates trade only in the four countries where it has had a political role: Japan, South Korea, Taiwan and the Philippines. Elsewhere, including in China, Europe either dominates trade or at least operates on equal terms with the US.

And all these countries are likely to react to the advent of the euro by gradually switching some of their reserves from the dollar into the euro to facilitate their external trade, thereby strengthening the euro. There is a possible downside to this: the euro could become too strong, making Europe's exports to the rest of the world more expensive. But the European Central Bank could manage this if it proved to be inhibiting growth. For it is always easier to ease up from a position of strength than to recover from one of weakness.