Is the Euro Good for Europe?

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[PRICES] Mayor Zankl reckons that filling up the tank in Austria saves Passau motorists as much as j30 per tank. Of course, the euro itself is not responsible for price differences, and residents on both sides of the border have long looked for bargains. But there's scant evidence overall that retailers are bringing prices in national markets closer into line. In a study this year of more than 300 products in 10 E.U. nations, the Belgian consumer association Test-Achats found a huge gap between the highest and lowest prices — as much as 45% for DVDs and 38% for car radios (see box). And when prices do move, they don't always come down. Stelios Haji-Ioannou, the founder of low-cost airline easyJet, says that the euro "has reduced the currency risks of running a business in Europe, and that must lower costs and hence prices for consumers." But he tells Time that it has also given some of easyJet's competitors in southern Europe the opportunity to raise prices to north European levels. "The problem is that [fares] are beyond the purchasing power of the locals," he says.

[INFLATION] Indeed, there is a widespread perception among European consumers that their new currency has driven up prices. In many countries the song is the same: when prices switched over to euros, they went up. "First they rounded up the prices and then very quickly, when the merchants saw people didn't understand what was going on, they raised them," says Stefano Zerbi of the Italian consumer group organization Codacons. "And the prices continue to rise." Earlier this year, a judge in the Italian seaside town of Ladispoli, near Rome, upheld the complaint of a local retiree backed by Codacons. He alleged that a Ladispoli café had unlawfully hiked the price of his cappuccino at the time of the switchover to the new currency from 1,500 lire (€0.77) to €1. The judge handed down a €0.23 fine and ordered the café to pay the man's legal costs. Many across the Continent share his frustration. A European Commission survey last December asking who won and lost in the currency changeover returned a crushing result: 89% of respondents said the switch had been bad for consumers.

Economists see the inflation picture as a bit more mixed. Official statistics show that the euro pushed up consumer prices by a tiny amount, somewhere between 0.12% and 0.29%. But while the price of many big-ticket consumer durables, such as automobiles or refrigerators, remained stable or fell, the cost of many everyday services — hairdressers, cafés, vending machines, parking meters — soared. "They may not amount to a large part of people's budgets, but they are very visible," says Jim Murray, director of the Brussels-based consumer lobby group beuc.

The issue remains highly charged as several countries consider whether to follow the lead of Finland and the Netherlands and eliminate 1¢ and 2¢ coins because they are expensive to mint and are viewed as an inconvenience by many shoppers. France, for one, won't follow suit. Getting rid of the small coins "would have a very bad psychological impact, as consumers already have the impression that the price of basic goods has come unglued because of the euro," the governor of the Bank of France, Christian Noyer, said earlier this month.

The bigger macroeconomic question is how to deal with inflation as it arises, given the one-size-fits-all monetary policy of the European Central Bank. During the period 2001-03, countries with the highest inflation rate, such as Spain, Portugal, Greece and Ireland, actually enjoyed negative interest rates after adjustment for inflation. By contrast, Germany, which had the lowest inflation, had to live with short-term rates that, at 3%, were too onerous for its slumping economy. "It's very hard to make a case that the single currency has led to improvements in the workings of the euro-zone economy. You could argue that in the case of Germany it's made things worse," says Merrill Lynch's Taylor.

[IMPACT ON BUSINESS] Back in pre-euro days, Germany's TWD Group, a mid-sized textile manufacturer, did about 20% of its sales in German marks. Now the firm, based in the Bavarian town of Deggendorf, does about 60% of its business in euros. While it still must deal with the ups and downs of the dollar, it's subject to far less exchange-rate turmoil than it faced a decade ago, when the Italian lira was abruptly devalued and other currencies came under strong market pressure. That enabled rivals in neighboring countries to undercut German prices. "It's a relief," says Yorck von Schmeling, TWD's chief executive, who says the euro has been "all positive" for his business.