Monday, June 17

Euro expansion to make travel less taxing


Currency switch will erase commission costs; drive consumer prices higher

Travel in Europe will become more convenient in the future,
experts say, after the European Union welcomed 10 new members on
May 1 who are expected to adopt the euro, the single EU
currency.

Since its inception in 1999, the euro has consistently been
stronger in comparison to the dollar, and the expansion of the EU
could make travel in Europe ““ long a popular destination for
students during break ““ more expensive for American
tourists.

But despite the potential increased expense, financial experts
say the expanded use of the euro will ultimately lead to a better
economic situation and fewer currency-related hassles while
traveling through Europe.

Currently, banks and other monetary exchange institutions charge
a service fee for exchanging currency, something that will become
obsolete with the adoption of the euro.

“Clearly the euro adaptation would be beneficial for
travelers. There would be no additional commission costs to
exchange the country’s currency to the euro,” said Eric
Melby, a consultant for the Scowcroft Group, an international
business advisory firm.

Melby added that another benefit of a single EU currency has to
do with the strict regulations countries have to follow to adopt
the euro.

“It is an indication that inflation has been brought under
control,” Melby said, regarding the adoption.

The expanded use of the euro also has its downsides, both for
the adopting countries and for tourists choosing to visit them.

“If things go wrong ““ if a shock hits your economy
but not the rest of Europe ““ you lose one tool to adjust to
that shock,” said Roger Kubarych, a senior economic adviser
for HypoVereinsbank Americas Inc., the second-largest bank in
Germany.

A single monetary system in the 10 new EU countries might also
translate into higher prices for consumer goods.

“You have to assume that as you integrate with another
area, your prices will tend to converge, and it’s a lot
easier to converge up than down,” Kubarych said.

“I can visualize 10 years from now prices in Warsaw being
higher then prices in Munich,” he added.

Neven Valev, assistant professor of economics at the Andrew
Young School of Policy Studies at Georgia State University, said
while the adoption of the euro would translate into higher incomes
for the people living in the adopting country, visitors will have
to face higher prices.

“Prices will increase because these countries will develop
much faster, with wages and income in Eastern Europe starting to
increase. Prices for all consumer products will go up as
well,” Valev said.

This eventuality is in the distant future for now since the 10
new countries would have to go through several steps before being
able to adopt the euro. These steps are taken to make sure the
country’s economies will be able to sustain the change in
legal tender.

“The countries would have to go into an exchange rate
mechanism that ties their currency to the euro with a permitted
fluctuation of 15 percent,” Melby said.

This exchange rate mechanism will give all the different
currencies from the non-euro countries a central exchange rate
against the euro, which in turn will permit those countries to have
a single rate for currency exchange against one another.

The hope is that this mechanism will stabilize exchange rates
and control inflation, allowing the 10 new countries to switch
permanently to the euro.

Four countries out of the 10, Poland and Estonia among them,
indicated their wish to start the currency conversion process, and
the other countries are expected to follow this mandatory step
toward EU integration in the future.

Roman Czarny, deputy counselor general for Poland, said this
process would not affect travelers currently in Poland because
currency changes are expected to go into effect only in about five
years.

The exchange rate mechanism will go into effect gradually, with
the country slowly phasing in the euro and phasing out its own
currency, a procedure that might take anywhere from five to 10
years.

“Euro integration will happen on many different levels,
like a big video game, not a simple on-off switch,” said Clay
Ramsay, research director at the Program on International Policy
Attitudes, an organization carrying out public opinion research on
foreign issues.

UCLA Anderson School of Management professor, Sebastian Edwards,
said this system has worked well for the 15 countries currently
part of the European Union.

“It took them a while to get used to it. There were
initial complaints that there will be a rise in inflation, but
other than that it has been pretty easy,” Edwards said.

“People are now used to it,” he added.

Not all of the 15 European Union members chose to convert to the
euro. Great Britain, Denmark and Sweden opted to stay out of the
euro system, citing a need for fiscal independence.

“The British just don’t feel that their conditions
are tightly synchronized with the rest of the continent to allow
them to lose the flexibility they have,” Kubarych said.

He added that this reluctance to adopt a single European
currency is understandable for some countries, and would not
necessarily harm their trade with other EU members.

“The United States has a very excellent relationship with
Canada. We don’t even think of it as a foreign country. They
have their own currency, and yet the Canadian-United States trade
linkages are very strong,” Kubarych said.

For now, he added, the convenience of travel in Europe will
depend a lot on the cash card.

Last summer Kubarych and his family went on a vacation to Europe
starting in Munich, Germany, which is under the euro system;
proceeding to Prague, the capital of the Czech Republic, which has
its own currency; and ending in Vienna, Austria, which is also part
of the euro countries.

“So how did we get money in all three countries? A cash
machine. We put in our card and out came either the Czech crown, or
the euro, as the case may be,” Kubarych said.

“The smart way to travel around Europe is with a cash
card. Basically, let them do the conversion,” he said.

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