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It has now been 25 years since the Netherlands made the switch to the euro by cashless means. In 2002, the cash exchange was to follow. In the 25 years of the euro, there has been a lot of discussion about the currency. But how did the transition to the new currency go? And why was there a discussion about the rate at which the guilder went into the euro?
The introduction of the euro went smoothly in the Netherlands. Exchange rates stabilised in 1998 and the euro was introduced in 1999. From that moment on, a guilder was the equivalent of 45 euro cents. From 1 January 2002, the cash form of the euro was introduced and it was also possible to pay with euro notes and coins. DNB had already made preparations for this months before the introduction and had provided banks and shops with enough banknotes. Shops accepted the guilder until 28 January, but only returned euros as change. As a result, the general public quickly switched to the new currency after the turn of the year. On 2 January, 65 percent of cash transactions were already completed in euros. On Saturday 5 January, this was already 90 percent and on 9 January 97 percent.
The then Minister of Finance, Gerrit Zalm, who holds the first euro banknotes in his hands.
As a result, the Netherlands had almost completely switched to the euro in just over a week. Cash exchange was faster here than in other countries. This was not only due to the favourable infrastructure, but also because coins and notes formed a small part of the payment system. In 2002, only 8 percent of the money supply was still cash, according to the book 'The Dutch Central Bank' by Wim Vanthoor. Cash has been losing ground in recent years, but last year we wrote an article about the future of cash. In the coming years, the disappearance of cash does not seem to be the case.
Although the introduction itself went smoothly, it took the Dutch a very long time to get used to the euro. In 2004, the European Commission carried out a study on the experience with the euro. It turned out that 68 percent of people in the Netherlands still converted large purchases to guilders. The Dutch scored low compared to other euro countries, as can be read in the book 'Dutch hubris', by economist Mathijs Bouman.
Administrators not only discussed the technical design of the euro, but also the external design. For example, administrators did not agree on the symbols on the new coins and notes. There were proposals to put Italian heritage on the banknotes, but this led to fierce displeasure from Hans Tietmeijer, president of the German central bank, former president of De Nederlandsche Bank (DNB) Nout Wellink said in a podcast with Holland Gold. "Tietmeijer almost exploded and he said; 'We are going to create a solid euro and the height of insolidity would be if we put Italian monuments on it'. That's why there are now all kinds of unrecognizable monuments on the banknotes," said Wellink, who was at the helm of DNB at the time.
In the years following the introduction of the euro, people felt that the euro had been accompanied by a series of price increases. In 2003, for example, no less than 93 percent of Dutch people thought that retailers had raised prices during the changeover to the euro. Nevertheless, the Central Bureau of Statistics (CBS) found that the euro had not caused high inflation at all. In 2001 inflation was still 4.5 percent. In 2002 inflation had already fallen to 3.4 percent and a year later it was only 2.1 percent. Thus, the feeling that inflation was very high was not supported by the figures from the CBS.
The cause for this 'Perceived inflation' was that the prices of frequently purchased products had risen. For example, the price of a drink in the pub rose, but prices of rent, for example, hardly increased. The idea that the euro led to high inflation is therefore unjustified. Twenty years later, in 2023, 'grabflation' become the word of the year. That term would have covered the feelings of the Dutch after the introduction of the euro, but it is not justified now. Last year, the Rabobank, The that the term grabflation was not entirely appropriate, as many producers were actually experiencing pressure on their profit margins due to strong competition.
Another discussion concerned the exchange rate. Some economists were of the opinion that the Netherlands had entered the euro 'too cheaply'. The reason for this was that after the fall of the wall, the East Germans were allowed to exchange their East Marches for Deutschmarks at an advantageous rate. As a result, high inflation had arisen and the Bundesbank had to raise interest rates. The Netherlands had pegged the guilder to the German currency and therefore had to raise interest rates as well, even though inflation was much lower here due to wage moderation. As a result, the German currency was overvalued and the guilder undervalued.
This issue was also discussed last year by the aforementioned Mathijs Bouman and Paul Buitink in the podcast of Holland Gold. Buitink found that the exchange rate of the guilder was incorrect at the time on the basis of a purchasing power analysis. According to him, the guilder should have been revalued and that would have made foreign products cheaper for the Dutch. Although the Netherlands had bad experiences with a devaluation under President Lubbers, a revaluation in the years before the exchange would be justified, according to Buitink. However, such a revaluation was politically very sensitive. The economist André ten Dam is also of the opinion that the Netherlands has suffered a loss as a result.
Mathijs Bouman disagreed with this line of thinking. According to Bouman, although there was an undervalued guilder against the mark, this had no impact on domestic purchasing power, since domestic prices also changed to the exchange rate of the euro. Moreover, any imbalances vis-à-vis Germany would recover in the medium term due to inflation differentials. For example, the Dutch economy grew very fast in the years after the introduction of the euro, while the German economy lagged behind. In 2024, therefore, there can be no question of a loss, according to Bouman.
In addition, due to its heavy dependence on Germany as a trading partner, the Netherlands benefited enormously from the link with the mark. Abandoning that link would have had very detrimental consequences for our economy, Bouman posited. Moreover, it would be illogical to suddenly change the exchange rate during the changeover to the euro, since it was already there in the years before prices were expressed in euros. And even if the Netherlands were to change the exchange rate just before the changeover, that would open the door for all other countries to adjust their exchange rates as well, and that would affect confidence in the euro. A revaluation, the economist reasoned, was therefore unnecessary and would lead to complicated negotiations.
The introduction of the euro is therefore very interesting. The discussions that were associated with it also have several interesting angles. It would be very interesting to hear these aspects again from guests on the show.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
