The eEuro: technology and monetary disunion

Citation

Birch, D. (2002), "The eEuro: technology and monetary disunion", European Business Review, Vol. 14 No. 3. https://doi.org/10.1108/ebr.2002.05414cab.004

The eEuro: technology and monetary disunion

David Birch

Keywords: Euro, EMU, Information technology

Four years ago, European Union (EU) finance ministers rejected a call by the European Parliament for the introduction of an electronic euro (the eEuro) as part of the preparation for the single currency (Financial Times Virtual Finance Report, 1998). The UK now has an opportunity to re-examine the topic. It could, perhaps, become the ultimate Blairite project: creating the first national currency for the twenty-first century.

ELegal tender

When Singapore announced that it would be giving up on boring old-fashioned paper and metal money and making electronic money legal tender (2008), it was a significant milestone on the road to new money for the new millennium. The Singaporean public, despite the estimated $400 million it will cost to make the change, are 85 per cent in favour of the move (Kok, 2001). A key reason why is because they expect it to make the economy more efficient.

We do not think much about the cost of money: because the cost of notes and coins is spread so thinly, we assume it to be free. But someone, somewhere is paying for the printing presses at the Bank of England, armoured cars transporting sacks of cash from supermarket to bank, thugs raiding building society branches with shotguns and having to put £4.50 instead of £4.20 into the parking ticket machine at Woking station through not having the correct change. In a world of smart cards, mobile phones and the Internet it is no wonder that people are beginning to think about the potential benefits of using new technology instead in this area.

If the government does decide to join Euroland, then it could rise to the challenge and make the UK the home of the "hard eEuro": the euro that exists in electronic form only but is legal tender for certain transactions. Think about it. Why did the common European currency have to be a single currency? It would have been perfectly reasonable to have introduced a common currency in parallel with existing national currencies, allowing people to choose the currency most appropriate to specific transactions (Robertson, 2002). The UK (and Denmark and Sweden) will, effectively, be in this position for the foreseeable future: a European traveller might use euros in Oxford Street and I might use sterling: since we are both using our debit cards, what does it matter? People who travel on the continent frequently might have both sterling and euro bank accounts, as would companies who trade with the Eurozone; others might choose to ignore it entirely.

The government does not need to mandate a specific technology for electronic money because it can leave that to the market. Make the euro legal tender for the payment of taxes and leave it at that: let people keep bank accounts in euros, let them store euros on their smart cards and email euros to each other using Paypal.

There is no need for the hard euro to physically exist at all. Throughout Europe, the banks have already decided to replace all of their credit and debit cards with "smart" cards (cards with a computer chip on them, as they have all been in France for over a decade). These smart cards are perfectly capable of carrying credit card, debit card and cash replacement applications on a single plastic card. As phonecards, as pay television cards, inside digital mobile phones, and in many other applications, these smart cards are becoming ubiquitous and consumers seem happy with them. No wonder that some 2 billion will be in use Europewide shortly, at the end of the euro transition period (Penrose, 1997), during which the euro and national currencies will be in parallel circulation.

If almost everyone will have smart cards, why bother with paper and metal? It is not just about cash cost savings: the issuing of an eEuro would have additional benefits, including the issuers of electronic money having more incentive to work towards interoperability and crossborder acceptance (Pettitt, 1998) which would hopefully mean that consumers would be able to use their eEuros throughout the EU (whether in retail shops or on the Net), thus stimulating trade.

As it has turned out, the electronic side of the Euro transition was an abject failure: the electronic purse (a smart card that stores digital money) has been a bit of a flop. Consumers in Holland can use German notes and coins to pay in shops in Spain, but they cannot use the German electronic purse (Geldkarte, of which there are 60m+ in circulation) or the Dutch electronic purse. It is not all bad news, however, as anecdotal evidence suggests a significant increase in the use of domestic purses since the introduction of the euro (e.g. in Belgium, where the four different Belgian franc coins were replaced by the eight euro coins).

Consumers, on the whole, do seem to be expecting such a change. A Gallup poll (Hunter and Madden, 1998) found that almost two-thirds of the UK population thought that notes and coins would vanish in the future and almost half of those interviewed thought that physical cash would disappear within a decade. The younger generation, intimately familiar with the Internet and mobile phones, would presumably have little difficultly in coming to terms with such a radical change!

If cash does vanish, one organisation will notice more than others: the Bank of England. Their Issue Department is Britain's most profitable nationalised industry, with an income of £1,635 million and expenses of £51 million. It sells notes to banks, invests the proceeds in government stock and collects the dividends and while the European Central Bank keeps 8 per cent of its seigniorage and distributes the rest to shareholders, the Bank of England (outmanoeuvred by Sir Robert Peel in 1844) has to pay every penny of its profit to the Treasury (Fildes, 2002).

The sums involved are not trivial (the government's profit on note issue is approximately equal to a penny on income tax). One might even say that if there are sections of the population who want to continue to use notes and coins, then they should pay for them: but that's a topic for another day (Birch, 1997).

In the long term

The world of smart cards and digital money might then develop in even more interesting ways. The technological platform used for the eEuro may have wider consequences because just as the smart cards (or whatever) reduce the cost to the Central Bank of creating a new currency, they would similarly reduce the cost to anyone else of creating a new currency (Birch and McEvoy, 1997). This might provide an interesting way forward for geographic regions who feel that national and supranational currencies are not optimal for them.

While politics and economics are not the subject of this article, it is worth noting that one of the common objections to the euro is that it is not easy to operate monetary policy on averages across a currency area. It is difficult enough running a country like the UK under a single currency, even though it has relatively well-integrated regions (Minford, 1998). How do you set interest rates: according to conditions in Reading or in Runcorn? Why not allow regions to issue their own money and set their own monetary policy? Once consumers have their smart cards, the cost of creating "Wessex Shillings" or "Yorkshire Brass" is trivial.

I have no figures to hand, but I would have thought that the overwhelming majority of personal transactions are local. Therefore, as a consumer I would have to consider the long term value of "Surrey Snobs" in relation to paying for my mortgage or buying a car, but I would not have to calculate exchange rates in my head every time I park the car at Woking BR station because the prices there would be quoted in Snobs.

Why would regions bother to do this? Well, as Sir Richard Body M.P. has pointed out, this represents a democratisation of currencies (Body, 1998). What is more, allowing the regional exchange rates to float would be a much more efficient and effective tool for economic stimulation than regional aid. If the value of Merseyside "Moptops" falls against Snobs, then people living in Surrey would naturally spend more on Merseyside. It may sound strange, but the euro is not the beginning of the end for monetary evolution in Europe: it is just the end of the beginning.

ReferencesBirch, D. (1997), "Do you take cash?", DEMOS Collection, Vol. 12, December, pp. 22-4.Birch, D. and McEvoy, N. (1997), "Electronic cash – technology will denationalise money", in Hirschfeld, R. (Ed.), Financial Cryptography, Springer, Berlin, pp. 95-108.Body, R. (1998), "As if people mattered", The Breakdown of Europe, New European, London, pp. 71-92.Fildes, C. (2002), "I'm applying to the Bank of England for a licence to print money", The Telegraph (Business section), 16 February, p. 32.Finance Report (1998), "EU reject e-Euro for EMU", Financial Times Virtual Finance Report, Vol. 3 No. 2, February, p. 2.Hunter, T. and Madden, A. (1998), "Spider brain makes web innovation", Scotland on Sunday, 15 February.Kok, L. (2001), Making Electronic Cash Legal Tender, in proceedings of Digital Transactions Forum, APSCA, Hong Kong, October.Minford, P. (1998), "Merseyside's message for Helmut Kohl", The Daily Telegraph, 23 February, p. 25.Penrose, P. (1997), "Faith in the future", Banking Technology, September, pp. 56-8.Pettitt, J. (1998), "EU refusal to go digital with euro is missed opportunity", Computer Weekly,19 February, p. 12.Robertson, J. (2002), "The Euro will prompt further monetary reform", European Business Review,Vol. 14 No. 1, pp. 67-70.