Tuesday, March 26, 2013

Adios Pesetas: A look back at adoption of the Euro in Spain

3/18/2013 Portland, Oregon – Pop in your mints…

The following is an essay written by a dear friend of ours, Tom Baker, in February of 2002 . Tom and his wife have lived in the region of Catalunya for a number of years. His observations regarding the currency transition which was about to take place in Spain from pesetas to the full adoption of the Euro may prove timely if and when a similar event takes place in your local. Enjoy!

Adios pesetas

A major milestone has come to Europe with the introduction of the common currency known as euros. Actually the Economic Union of 12 countries (Trivia question–can you name the 12 countries? answer below) has been on the euro standard for the last 2 years, with exchange rates fixed permanently between the currencies of the member countries. Everyone was really using euros, but they just looked different in each country.

Now in the last month, the last major hurdle has been addressed with the withdrawal of all local currencies from circulation, and their replacement with euro coins and bills. Think of the problems involved in changing the currency of 12 countries (approximately the size of the US) with 12 different monetary systems simultaneously.

Prices for goods have been posted in both pesetas and euros in the larger stores for the last year to accustom people to thinking in euros. It isn’t easy-we have gotten used to valuing items in pesetas, and even though the euro is close to a dollar in value, that hasn’t helped much. So it must be worse for those that have lived with pesetas all their lives.

Spanish FlagThe schedule is for 2 months of dual circulation, with only euros after that. Now for some details of the tactics used. Most cash registers are electronic and have been reprogrammed to handle both currencies. Banks had kits of euro coins available in December for their customers so people could start getting used to the feel and appearance, but they could not be used until Jan 1.

The big change-over day (Jan 1) was of course very quiet, the major change being that most cash machines only dispensed euro bills. Then the tactic to force the change-over was that customers could pay in either currency, but always received their change in euros. So all the stores were sucking pesetas out of circulation.

It was a bit chaotic in the first week, with small merchants having to do the conversions on calculators. Lots of mistakes were made, lots of people were confused, but the pesetas were disappearing briskly. A few operations had problems with machines that accept coins, especially the toll roads. So they decided to shut down the automatic coin machines until the conversion period is over, giving them time to convert them to euros. If you want to pay cash, you have to give it to a human operator, otherwise use a credit card for automatic payment.EU-flag

The use of credit cards in general was encouraged to reduce the demand for change initially. There were some shortages of coins, especially when the big traditional sales kicked in on Jan 8. Now after a month of usage, the euros are seeming more natural and the prices are starting to make sense. Pesetas have disappeared-all transactions are in euros now.

[A cartoon that I saw showed a bank robber at the counter, and the cashier asked if the transaction would be in pesetas or euros].

In our house, and I’m sure in most others, there was a sweep to collect all the pesetas and get them spent. Then you find another coat pocket with a handful of coins, plus an envelope with French francs, another with Italian lira, etc. There are cans with slots in all the banks for those last few stray pesetas to help children around the world. We’re going to haul our francs to France for one last meal there before the pumpkin-hour. The lira we sent with friends that are visiting Italy.

If you are holding on to European currency, send it to me immediately :-) . No, just kidding, but you do need to change it. Bills you should be able to change at major banks until March 1 when all local currencies will disappear; after that you will have to change the money at the state bank in the country of the currency. They predict that at least a third of the currencies will never be turned in. That is pure gravy for the governments.

A side effect of the change-over is its effect on black money. Spain and other areas of Europe have a sizeable underground economy, with all transactions in cash, not reported to the government for tax purposes. Now some people are stuck with bundles of currency that will soon be unusable. So the sales of luxury items skyrocketed in December, especially expensive cars.

Also there seemed to be a lot of money being poured into new construction, and housing prices have risen dramatically in the last year. We will see if they subside in the coming year. The government has promised to look into suspicious purchases of luxury items. There were reports of Germans hauling carloads of marks into Switzerland.

On your next trip to Europe, you will find things much easier, with only one currency to carry unless you visit England, Switzerland, Denmark, Sweden, or Norway. I wonder how much this will affect tourism into these countries?

The last thought is the number of colloquial sayings that will disappear from the language. “No vale ni un peseta” = “It’s not worth even a peseta”. The common words used for money were duros (5 pesetas, or like a nickel), and pelas (1 peseta). These will disappear.

Euro coins:

1, 2, 5 Cents, Centims, Centimos-Copper colored

10, 20, 50 Cents-Gold colored

1, 2 Euros-Gold outer band, silver inner section

The “front” side of each coin is unique to each country, while the “back” side is common to all.
Euro Bills: 5, 10, 20, 50, 100, 200, 500

Euro countries: Spain, Portugal, Ireland, France, Germany, Austria, Italy, Greece, Holland, Luxemburg, Belgium, Finland

We wish to thank Tom for allowing us to share his essay with you, our fellow taxpayers. It is both an interesting, first hand look at a significant event in the history of world currencies as well as an instructive guide as to how one may prepare and what to expect should the monetary authorities in your locale choose to swap their existing national currencies for some flavor of supranational currency, such as the Euro.

At the time the Euro was adopted, it appeared to have a number of benefits for the adherents despite the minor inconveniences and sometimes painful price adjustments (we are told that the typical café, which before the Euro went for 100 pelas (see above) was immediately repriced up to a round 1 Euro (roughly 162 pesetas), an instant 62% increase) that were experienced in its adoption.

Now, some eleven years later, five of the countries on the above list have experienced significant economic distress, while others teeter on the fine line between growth and solvency.

It is important to note, however, that the countries that are now in distress experienced substantial economic booms related to the Euro adoption. Their governments were allowed to borrow at rates which were aided by the strength of their European neighbor’s finances and, as Tom pointed out, the Central Banks made a windfall profit on the quasi confiscation of nearly 1/3 of the currency in circulation.

Was it worth it? In terms of currency history, 11 years is a bit too soon to make a call, but either way, we have a feeling that a similar sort of currency “consolidation” awaits many in the not too distant future. It will not be some sort of conspiracy, as many believe, but simply an attempt by the desperate governments of the world to shore up their ailing finances.

It will ultimately fail, but that time may be farther off than it seems.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for March 18, 2013

Copper Price per Lb: $3.51
Oil Price per Barrel: $93.21
Corn Price per Bushel: $7.16
10 Yr US Treasury Bond: 2.01%
Gold Price Per Ounce: $1,596 THE GOLD RUSH IS STILL ON!
MINT Perceived Target Rate*: 0.25%
Unemployment Rate: 7.7%
Inflation Rate (CPI): 0.7%
Dow Jones Industrial Average: 14,496
M1 Monetary Base: $2,466,100,000,000 LOTS OF DOUGH ON THE STREET!
M2 Monetary Base: $10,499,300,000,000