Euro News 2001

Frequently Asked Questions

Is the Euro a craze and will it last? This is not the first time we have had a European currency. Indeed, during the Roman Empire there was a tradable unit of currency throughout the whole of Europe, widely accepted from the Balkans to Hadrian's Wall. Ironically only a few hundred years ago a silver coin, predominantly produced in the UK, was widely accepted as a common unit of currency throughout Europe for its reliability and genuine value in weight.

The latest version has some distinct similarities with the yo-yo, which has reappeared as the ultimate toy for all ages. Like the yo-yo, the Euro could fade in popularity.

Recent problems include dramatic differences in unemployment thought Europe, especially in Germany, and the strains of running a single currency. This is, effectively, a single economic package, with interest rates the same in Greece, Portugal, Germany and the UK. The totally different economic structure of these countries will be very difficult to handle.

In the short term - at least the next five years - the Euro will survive and we will join, probably sooner than most people believe. Indeed, there is a strong argument that we are all but in anyway. Sterling will slowly decline to a fixed rate with the Euro where it will stick on a semi-permanent basis. Business will increasingly trade in Euros, both outside and inside Britain. UK business will fix contracts in euros for stability, ease of forward planning and to avoid currency risks.

Without any Act of Parliament it is probable that you will be able to buy and sell shares, investment trusts and unit trusts, settle your credit cards and deal with you banking arrangements in euros within a relatively short time.

The Euro is here and we are there, whatever the politicians might tell you.

Euro questions and answers ...

When will the Euro see the light of day?

January 1, 2002 is when the first notes and coins will be issued, provided they do not have to melt them down and re-mint them too much more. Exactly a year earlier, those who wish to will be able to use cheques and debit and credit cards to settle bills. Most of the big companies trading in Europe will begin quoting their prices in euros.

Can I open a Euro bank account?

Banks in the 11 countries who are introducing the Euro in the first wave have started to offer bank accounts since January 1999. Many UK banks will also offer this facility in this country to help importers and exporters. Also from January, the Bank of Ireland will quote dual balances on euros and punts.

How will it affect prices?

At the moment, prices for all sorts of products vary widely across Europe. For cars, the difference can be more than 40%, or even 100% for items such as Coca-Cola. When the single currency comes in these differentials should erode due to price comparison becoming easier and the ability of traders to import goods from cheaper countries without the risk of getting caught out by the exchange rate. Opinion is still divided over whether prices will be levelled down or levelled up. There is also debate about whether there will be a similar effect on wages.

What will happen to housing costs?

Economists are predicting that house prices could boom here if the markets believe that the UK will definitely join the Euro soon in the near future. To support this they cite the Republic of Ireland, where house prices have increased by 30% a year for the past two years, helped by lower interest rates in the run-up to the single currency. They so acknowledge however that demographic considerations and a strong economy may also have had a hand in it.

What about travelling in Europe?

This is likely to be easier and cheaper as there will be far less need to change from one currency to another. This should also bring down the costs of travel firms themselves. Whether this is passed on to the rest of us remains to be seen.

Will my mortgage be affected?

Some pundits are expecting mortgage rates to fall if we adopt the Euro because, they say, there will be a greater choice of providers and more transparency of pricing. On the other hand, some experts are saying there will be little increase in cross-border activity, because there are large differences in the various housing markets and their accompanying legislation and regulation structure.

One of the main differences between here and the Continent is that we tend to use variable rate mortgages, while in most of the rest of Europe they have fixed rates. So when the European Central bank changes interest rates, our housing costs will jump up and down while those on the Continent will remain stable. What effect this has on inflation rates across the EU will be interesting to watch.

Whether UK banks and Building Societies will offer mortgages in euros will depend on the demand. It is thought that some executives of the UK operations of Continentally based companies may be paid in euros.

What will happen to my savings account?

The real value of savings may be eroded slowly. While the expected lower inflation rates will help protect the value of savings, it is likely that lower interest rates will just tip the scales in favour of erosion. On the other hand - and there always seems to be another hand - the same competition and transparency mechanisms which affect prices will also affect interest rates, with banks across Europe competing for your savings.

When will I need to buy and sell shares in euros?

In the entire Euro zone all shares are now traded exclusively in euros. Switzerland and Sweden are also trading in euros in the shares of some larger companies. The London Stock Exchange is running a dual Euro and sterling system for the biggest 106 UK-quoted companies. The main change has been the ability to buy shares across the Euro zone without worrying about exchange rates and the currency traders commission.

What will happen to the pensions market?

Very little. While in theory you will be able to buy pensions from anywhere in the Euro zone, in practice the differences between the member countries are likely to discourage cross-border selling for the foreseeable future.

What will happen to investment funds?

Many currency cash funds are likely to switch to Euro funds as soon as possible. European bond funds may be the most affected, as one of the current ways of adding value is through taking advantage of currency differentials, which, of course, will no longer apply when there is a single currency. Also it will no longer be possible to exploit differences in investment yields from country to country.