Dm federal credit union

Abstract

At the beginning of year 2002, new Euro banknotes and coins became the means of currency for about 330 million people in twelve countries of the European Union. Misgivings concerning the Euro were especially prevalent in Germany. This paper utilizes an e-mail survey distributed to a sample of people in Germany in order to determine German consumer perceptions towards the Euro and the impact of the Euro conversion on international credit managers and professionals. The results show that German consumer perceptions significantly differ with respect to both consumer age and level of education. There is widespread dissatisfaction with the Euro. One can conclude that synchronized accounting standards due to the Euro conversion will enhance financial analysis for international credit managers. Hence, the conversion to the Euro should lead to significant credit enhancement.

Introduction

On January 1, 2002, the new Euro banknotes and coins became the physical and real currency throughout Europe. This first day in January 2002 made history by recording the largest currency changeover the world has ever seen. Never before has the world seen so many different countries sharing the same money. The day marked the last stage in converting the Euro, since twelve European countries (Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland and Greece) of the fifteen European Union members had agreed in 1992 to create a common currency. A subsequent stage led to the establishment of the European Central Bank (ECB) on June 1, 1998.

Although the Euro was already implemented on January 1, 1999 when the exchange rates of participating currencies were irrevocably set as a legal non-cash currency in economy transactions, January 1, 2002 was the first day that the Euro entered the pockets of about 330 million people in Europe. The old national currencies of the Euro-zone countries have been replaced by seven bank-notes (euro5, euro10, euro20, euro50, euro100, euro200, euro500) and eight coins (1, 2, 5, 10, 50 cent as well as euro1 and euro2).

During a transition period in the first two months of the changeover, the old and new currencies were circulated in tandem, allowing local currencies to still be used in the stores. Beginning March 1, 2002, the old currencies ceased to be legal tenders. Hence, the German mark, which was revered as a symbol of postwar success, disappeared on March 1, 2002.

The consequences of the Euro introduction, especially with respect to monetary stability, purchasing power, price, and economic stability, have been hotly debated since the Euro was implemented as a non-cash currency in 1999. Many people within the Euro-zone have feared that more disadvantages than advantages will arise as a result of the currency conversion. Especially in Germany, the emotional side became very important. The beloved and stable D-Mark had restored the self-confidence of the Germans after a fatal World War II.

However, the European governments have consistently assured there would be no price increases as well as no loss in purchasing power across Europe. Furthermore, these European governments have emphasized the Euro conversion advantages including: simplifying cross-border trades and investments; economic and political stability; price and wage comparison between the European countries, and the disappearance of money exchanges within Europe.

Nevertheless, many people were skeptical of the politicians' promises and had serious reservations regarding the conversion, especially with respect to price stability. The biggest complaints in Germany have been about price increases (Andrews 2002).

This paper helps to determine German consumer satisfaction towards the Euro in the year after the monetary conversion had taken place. This study focuses on the perceived advantages and disadvantages of German consumers with respect to their own daily lives as well as their perception of the economy in Germany and Europe. The paper attempts to indicate if some of the misgivings have been realized especially regarding price increases. The perceptions of the Euro conversion with respect to age and educational level are analyzed. Major conclusions are provided in order to help determine whether the Euro conversion will have a significant impact on credit mangers and professionals with regard to international credit management.

Literature Review

Since the Euro was introduced into twelve members of the fifteen-member European Union, newspapers and journals report vastly different opinions about the advantages and disadvantages regarding the conversion. There is especially disagreement in the literature as to the expectations with regard to whether prices might rise due to the change from francs, marks, pesetas, etc.

McNatt and Failamb (2002) emphasize that many merchants are effectively lowering prices by rounding prices down in order to translate prices from local currencies to the Euro, in an effort to reassure consumers. For instance, a 49.99 mark pair of slippers at a Frankfurt Woolworth's should now cost 25.51 Euros, but will usually be sold for 24.99 Euros. In another example, Aldi, a German discount chain, used the Euro arrival to cut prices an average of 3%. In general, the article points out that many consumers seem pleased, because the new currency buys more than the old currency. In addition, the authors stress that with easy cross-border price comparisons, stores will feel more pressure to hold down prices.

On the other hand, Borst, Kowalski and Schuster (2002), reveal that more than 62% of Germans are convinced that prices on the average have risen after the conversion. The authors emphasize an actual focus price comparison. This comparison points out that many Germans assert that they now have to pay more for many products of daily life compared to one year ago and that although many politicians predicted a stable price, Germany is facing significant inflation.

Parker (2002) also asserts that there is likely to be a temporary price increase due to the conversion to the Euro. However, Paterson (2002) argues that the Euro will have little impact on prices. She makes the assertion that as soon as consumers can detect exactly how much prices vary between the Euro states, businesses will be able to synchronize significantly differing prices. A key point is that the higher energy taxes and the weather-related price increases for fruit and vegetables that occurred at the time of the Euro conversion, are, for the most part, only one-time events.

Federal Statistics Office of Germany (2002) analyzed the impact of the introduction of Euro banknotes and coins on price trends. The results of the study indicated that the introduction of Euro banknotes and coins did not have a major influence on the overall consumer price index for all households in Germany. The study, which analyzed some 18,000 prices series from 35 groups of selected everyday consumer goods, indicates that when adjusted for special effects (tax increases and weather-related prices for fruit and vegetables), the rate of price increase was only 1.6% in January 2002, which was in line with the trend of the preceding months.

In addition, the Federal Statistics Office of Germany (2002) points out that the conversion effects should be most prevalent in the service sector. For the ten food products examined, a slight price decrease of 0.2% was observed for the period from December 2001 to January 2002. The available data support the assumption that food retailers raised prices to set new DM threshold prices in 2001, before Euro banknotes and coins were introduced in order to reduce Euro threshold prices after the currency conversion.

Regarding economic stability, most of the research seems to agree that Germany and the rest of Europe will benefit in the long-run from the Euro conversion. However, Bequelin (2002) asserts that the economies will improve only transparently. He states that the absence of monetary rebalancing will probably weaken the Euro-zone and that overall the positive benefits of the Euro have probably been exaggerated.

The Euro provides major opportunities for Germany due to the country's eight borders in the center of Europe. Six of Germany's neighboring countries now share the same money. In fact, FDCH Regulatory Intelligence Database (2002) points out that Euro coinage is now acceptable across 12 borders, whereas before the introduction of the Euro, a country's coinage was acceptable good only in that particular country.