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Cashing in on the Euro
Subject Exchange Rates
Topic International Finance
Key Words Currency Union, Exchange Rates, Economic Growth
News Story

Although the euro had its debut on January 4, 1999, its circulation was confined to electronic payments and world financial markets. Exchange rates among the euro and world currencies have been established for over two years and individuals have been able to open a euro-denominated bank account and to make purchases and write checks in euros. However, Europeans have never seen a euro. The first euro coins and bills will be circulated on January 1, 2002. Many people fear that Europe is not prepared for the euro and that people do not realize that in less than four months their domestic currency will disappear.

There is much apprehension that the introduction of euro cash will be chaotic. Although most stores have been posting prices in both domestic currency and euro values, most people interviewed do not know the exchange rate between their currency and the euro and 80 percent of those interviewed could not remember a single euro price. Banks fear that counterfeiters will use the opportunity to introduce bogus bills and criminals will easily be able to launder money.

The changeover is quite a task. As of January 1, there will no longer be French francs, German marks, Italian lira or any of the 12 currencies that correspond to the 12 Euro nations. Individuals will have to exchange all of their cash for euros. All ATM machines will have to replace existing currencies with euros. In all, about 50 billion new coins and 14.5 billion euro notes will be pumped into circulation. In some countries, like Finland, there are not enough delivery trucks to reach outlying areas in a timely fashion. There are fears that inflation could be triggered as merchants round up prices as they convert to euros.

It is hoped that the conversion to euro coins and notes will give new legitimacy to the euro. Europeans will be able to use the same currency in any of the euro countries without having to make a currency exchange. As a result, trade could grow and overseas investment could increase.

(Updated September 1, 2001)

Questions
1. The introduction of a common currency was part of the establishment of a Currency union. What is a currency union? What are some of its advantages?
2. How would a French baker, for example, selling a baguette for 5 francs know how to price this bread in euros? Suppose you read that 6.56 French francs equaled 1 euro, could you help the merchant determine the appropriate price? What is the euro price?
3. When the euro was first introduced, the dollar/euro exchange rate was $1.17. Currently, the exchange rate is $.90. What happened to the value of the dollar?
Source Suzanne Daley, "Coming of Europe's New Cash Feeds Jitters Large and Small," The New York Times, August 15, 2001.

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