Euro Not to Blame for General Price Increase

Shortly after Europe’s new single currency, the euro, debuted in January, consumers began seeing a connection between higher prices and the new monetary unit. But was there really a connection or did a combination of independent factors lead to higher prices at the same time the euro was introduced?

Germany's Federal Bank was given the task of finding out what actually resulted in the very real price increases.

Consumers say euro is to blame

In their neighborhood grocery stores, the cost for vegetables skyrocketed. Cucumbers were suddenly two euro ($2.02) a piece, whereas they had previously sold for less than a quarter of that sum. The cost for a hair cut rose 30 percent, dry cleaners were charging double their normal price, and a beer at the local pub cost two times more than it had prior to the introduction of the euro.

Everywhere German consumers looked, things were more expensive than they remembered them being before the currency changeover. Their conclusion: the euro was leading to higher prices.

No matter how many times the Federal Statistical Office in Wiesbaden published "shopping" reports showing that the euro-linked increases were "subjective" and reflected an overall market inflation, German consumers felt like they had been taken to the cleaners. In their eyes, the euro was to blame for the dwindling money in their pockets, and no number of statistics could change their way of thinking.

Federal Bank investigates consumer complaints

In June, the German Federal Bank was called in to investigate the situation and to clarify once and for all, whether or not the euro actually had led to price hikes as consumers claimed.

To arrive at its findings, the bank examined 35 products and services, from a ticket to the movies to pantyhose, a visit to the hair salon and the cost of a simple auto repair. The bank then compared the average prices for the products in 2002 with the prices from 2001.

The bank’s results seemed to confirm what consumers had been saying all along: the prices for individual products had in fact increased dramatically for 2002.

But this is not the entire story, the Federal Bank warned in its July report. Many of the price increases registered in 2002 actually dated back to December 2001, and therefore could not be directly linked to the introduction of the euro.

Price increase predates euro

According to the Federal Bank, from January to November of the previous year, the prices for the products surveyed stayed relatively stabile. It was only in December that an obvious increase could be registered.

The bank attributes this price creep to an "adjustment away from the earlier attractive DM rates to more ‘crooked’ DM rates" that would later lead to an easier transfer to the euro. In other words, the price for a particular product was hiked up a few cents to make way for the introduction of a nice rounded euro price.

As a result of this adjustment process, the price increase for commercial goods in December was one third over the previous year’s rate, says the Federal Bank. "And with an increase of 2.8 percent above the previous year, the service sector also recorded a significant price jump in December," the Bank writes in its report.

Even harder hit were the prices for food products. "According to the official price index for living standards, food in general increased by 5.3 percent in December," says the bank. But the bank attributes the steep price jump for food to factors outside the finance market. Bad weather conditions and a series of food scandals such as mad cow disease and foot and mouth disease were largely to blame for rising costs.

Exchange rate is the key

In January, more than two-thirds of the 18,000 prices examined in the bank’s study were converted correctly with the exact exchange rate of DM 1.95583 = 1 euro. The other third, the Federal Bank points out, was adjusted up or down to correspond to a rounded euro figure.

"Most of the times the adjustments were minimal and were only intended to correspond to an attractive euro price. Around half of all the adjustments occurred by rounding the price up; very few prices were rounded down," the bank’s report states.

In a few other cases, the Federal Bank admits that stores took advantage of the confusion surrounding the new currency to jack prices up beyond an acceptable rate. "The limited price transparency during the period of conversion from mark to euro was exploited by some to hike up prices significantly," the bank says.

The consumers are therefore correct in their assumption that the euro was accompanied by price increases, acknowledges the Federal Bank. "In individual branches, the introduction of the euro was used to cover especially high price increases. This was especially the case in the service sector, where prices in restaurants and hair salons were raised dramatically as were the fees for repairing cars and electronic equipment."

Nonetheless, the bank cautions against a general tendency to blame the euro for higher prices. Too often, it says, when consumers convert prices in their head, they use the rule of thumb "one euro equals 2 marks." Such an inaccurate calculation automatically results in a subjective price increase of 2.25 percent over what the actual mark price would be.

Euro gaining in favor

Despite the complaints about higher prices, consumers are slowly warming up to the new currency. A recent study by the marketing research institute NFO-Infratest shows that nearly 45 percent of 1,000 Germans interviewed are in favor of the euro and regard it as equally as stable as the mark. 19 percent of those surveyed said that in the long-term the euro will be stronger than the old national currency. This is considerably lower than the 28 percent who feared a weak euro at the beginning of the year.

Once the price discrepancy from the beginning of the year levels out and prices resume a normal level of acceptance, the euro will most likely gain even more supporters among the Germans.