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Introducing Euro notes and coins to the public

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The introduction of Euro bank notes and coins on January 1st 2002 is an operation of unprecendented magnitude in the financial and monetary world. This report provides a first analysis of this operation from the viewpoint of retailer cash transactions. Interviews reveal that retailers are postponing detailed preparation of the introduction of the new currency until the legal and operational aspects of this operation have been clearly specified. In addition, though their financiak and accounting systems can indeed handle two currencies (as is already the case for many), the situation is very different for the simultaneous physical handling in stores of two different currencies. This would indeeed be an experiment ,which is widely seen by retailers as unnecessarily difficult, unsafe and costly ( for both retailers and consumers). In addition, dual currency regimes entail very different consumer behaviors as compared to single cxurrency regimes. In some cases, consumer behavior during a dual currency regime may actually render the introduction of the new currency more difficult. Different scenarios, based on retailer transaction data, projected forward to the early days of January 2002, allow the exploration of the amounts of coins and notes required by retailers in these early days of the new Euro currency. in particular, the policy of no-frontloading of Euro coins and notes leads to a dramatic (and underestimated) explosion in the invetory requirements for retailers of both coins and notes. It is likely that not all retailers will meet these huge cash requirements at the beginning of January 2002 (if only due to shortrun cost imperatives). Shortages in the supply of the new Euro currency can therefore be expected to occur in the early days of January 2002. These scenarios illustrate the material and immaterial costs that might be borne by retailers in the chang-over operation, and the difficulties that might arise should consumers face an insufficient amount of the new currency, or go to stores with an excessive number of large notes. The costs, seem, under plausible scenarios, far from neglibible, and possible of the order of yearly retailer profits. This identifies the sharing of the burden of the changeover as a key, albeit difficult policy issue to be faced. Concerning the actual introduction of coins and notes, the study underlines the dramatic increase in the use of 5 and 10 Euro notes compared with either larger denomination notes, or coins of smaller denomination. Particular attention thus needs to be paid to the introduction of a sufficient number of small denomination notes into the economy. In that sense, the so-called 10-Euro kits are likely to prove insufficient to introduce the Euro currency to consumers. Larger Euro-kits need be considered, as well as a greater reliance on technological solutions to facilitate and complement the introduction of the new Euro coins and notes. Again, coordination of efforts amongst the different actors in the "cash" supply chain (ECB, commercial banks, retailers) is essential to mitigate against worst case scenario where stores are running out of cash in the first few hours of operations and are thus forced to shut down and close the shop.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2000/2000-20.pdf

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Copyright INSEAD. All rights reserved