EURO INTRODUCTION IMPACT ON THE FAST

Euro Introduction Impact on

The East

By Radulescu Cristian Robert

Seria D grupa 121

Fac de Management

The euro will change the lives of people living in Western Europe when it is introduced into circulation at the start of next year. But it will also affect people living in Eastern Europe and the former Soviet Union, where the German mark is widely held and used as a transaction currency. Those marks will cease circulating shortly after the euro's introduction. In this third of a three-part series on the common currency, RFE/RL correspondent Mark Baker looks at what impact the euro will have outside the 12-nation euro-zone.

Prague, 15 June 2001 (RFE/RL) -- The German central bank (the Bundesbank) estimates that more than one out of every three German marks circulates outside of Germany -- signifying billions of marks. The banks says the majority of them are in Eastern Europe and the territory of the former Soviet Union.

Because of the mark's stability, and Germany's role as a place of employment for Eastern European workers who send their money home, the mark has evolved into a de facto second currency in the lands to the south and east of Germany's borders.

Montenegro and Kosovo have even adopted the mark as legal tender. Other countries have pegged their currencies to the mark through currency boards. Bosnia uses a unit of exchange called the 'convertible mark,' which trades on a one-to-one basis with the German mark.

But the mark -- along with the other currencies of the European Union's 12-nation euro-zone -- is about to disappear.

On 1 January 2002, more than 250 million people in Western Europe will begin exchanging their national currencies for the euro. Older currencies and euros will circulate together until the end of February. After that, the national currencies will no longer be used.

That does not mean the currencies will be worthless. Central banks will continue to exchange them for euros for several years to come. But for all intents and purposes, Western Europe's national currencies -- including the mark -- will cease to exist.

Hans-Werner Sinn of Germany's Ifo economic research institute has looked into all aspects of the coming changeover. He says Eastern Europeans, like their counterparts in Western Europe, will eventually have to exchange their marks for euros.

'Clearly, these Deutschemarks [German marks] will no longer be useful in the long run. So people will have to bring the Deutschemarks in to their respective banks and exchange them into euros. That will have to happen in the spring of next year [by the end of the February deadline].'

Antti Heinonen, the director of banknotes at the European Central Bank, or ECB -- the institution that is coordinating the switchover to euros -- says that the change should not cause many problems for most Eastern Europeans.

Heinonen recommends that people outside the euro-zone simply deposit their marks into a mark-denominated bank account. On 1 January 2002, these accounts will automatically be switched over to euros -- in most cases without incurring a transaction fee.

'I think in most cases the smoothest way is to open an account, a euro account -- or let's say today to open a [mark] account or a French franc account or so on -- and then, let's say after the first of January, go to the bank -- because they have changed these accounts to euro accounts -- and then you deposit your money to the account. And if you need some euros, you take some euros from the account.'

Peter Nicholl, a native of New Zealand who is the governor of the Central Bank of Bosnia and Herzegovina, agrees that setting up a bank account is the easiest solution. But he says that convincing people to put their savings into banks will be difficult in countries -- like Bosnia -- where confidence in the banking system is still fragile.

Nicholl estimates Bosnians are holding as many as a billion German marks under their mattresses, and hopes that at least some of these marks find their way into the banking system.

'It's possible, I think, that people holding [the German mark] under the mattress as savings may be prepared to deposit it at the banks. A year ago that would not have been possible because the banking system was so weak -- that's why the people had the Deutschemark under the mattress. But the banking sector is improving. There is a limited deposit insurance scheme that has started. So I think there is a possibility that some of [the marks] will actually go into the banking system.'

Nicholl tells our correspondent that it's still unclear whether Bosnia's merchants will accept German marks in payment after the February deadline for when euro-zone currencies will cease being legal tender.

'That's hard to say. That's a possibility because [the mark] has been used here for a very long time.' To educate the population on the mechanics of the changeover and to encourage them to surrender their German marks, Bosnia's bank plans to launch a publicity campaign next month.

Nicholl says the switch to euros will not present a problem for the overall banking system. After 1 January, Bosnia's convertible mark will simply be pegged to the euro, much in the same way that it is now pegged to the German mark. The same is true for other countries using a currency board or linking their currency to the mark.

The situation is similar in Macedonia, where bankers say that between 400 million and 1 billion marks are held in private hands. While Macedonia does not use the German mark officially, it is the currency of choice for people to hold their savings.

Hari Kostov, the general manager of Komercjalna Banka in Skopje, admits that convincing people to part with their marks will take some effort. He says Macedonia is also launching a publicity campaign to encourage people to deposit German marks into bank accounts.

Kostov tells RFE/RL that to attract more marks, his bank will exchange them for euros without levying commissions or transaction fees.

'We have decided that [exchanging marks for euros] will be done -- just to facilitate and so on -- it will be done without any fees for [the people].'

People living in Kosovo and Montenegro, where the mark is now the official currency, will have no choice other than to switch to euros with the euro-zone after 1 January 2002.

Reports say that citizens of Kosovo and Montenegro are not very aware of the euro and that a massive education effort will be needed.

The managing director of the international community's Banking and Payment Authority in Kosovo was not available for comment, although officials at the ECB say they've been in contact with officials in both Kosovo and Montenegro about adopting the euro and that the two areas will be ready.

Ifo's Sinn is optimistic and says the changeover may be more successful in these areas than elsewhere in the Balkans because the central banks will be involved.

'[Adopting the German mark as the official currency --] this is a unilateral decision of the government of Montenegro. And they [Montenegrins], I think, will not do it very differently from other countries. They will allow their banking system to convert the currency. They may even do more because it's an official currency [because] the central bank will be involved in this activity.'

Sinn says that in the long run, all of Europe -- East and West -- will benefit from the euro.

'The euro will significantly facilitate trade within Europe because the exchange risk is no longer there. Trade between Eastern and Western Europe will be handled in terms of euros. Prices will be stipulated in euros. And I guess the euro will become the second currency in the Eastern European countries -- even before they officially join the European Central Bank.'

But the currency's first challenge -- in Eastern Europe at least -- will be to replace the mark in people's minds and mattresses.