May 27, 2013
Due to rising copper and iron prices the face value of 1 and 2 cent Euro coins has fallen below their material value so that the EU has made a cumulative loss of € 1.2 billion over the last 10 years. In addition, the handling costs of small change – transport from central banks to banks and traders, cash operations – have kept rising due to annual inflation.
It is therefore no surprise that the EP have asked the EU Commission to examine the usefulness of keeping them as legal tender. After consultations with stake holders the Commission has presented four options: status quo, reducing the cost of issuance, rapid withdrawal and phasing out.
The first two options are not satisfactory. They do not resolve the issue of high economic cost of small change. That is what has prompted Australia to withdraw its one and two cent coins 20 years ago while keeping them as legal tender.
The EU should follow the Australian example and take the one and two cent coins out of circulation after a short withdrawal period, say of three years. It should do so with a minimum of fuss .
Contrary to what Australia has done the EU should refrain from imposing binding rounding rules, compliance of which is impossible to control. Competition is more effective than administrative rules; and whether super-markets etc. will round up or down will not measurably affect the inflation rate.
Whether the coins should remain legal tender as in Australia , should be decided pragmatically. For reasons of simplicity It seems best not to keep them as legal tender and thus force the monetary authorities to write off their losses once and for all.
The withdrawal of one and two cent coins from circulation would have three major advantages for citizens and business:
- Citizens would no longer have their wallets burdened by worthless small change.
- Business would find the job of fixing prices easier as it would only have the choice between €1.05 and 1.10, skipping €1.01, 1.02 etc. More important for the consumer, “psychological” prices like € 4.98 or 4.99 would become slightly more meaningful with €4.95 and 4.90.
- Banks and retailers would have to pay lower handling charges for very small change.
Inflation fears resulting from the withdrawal are totally unfounded.
So are fears by charities of collecting less money. Citizens will give one 10 cent coin instead of 10 one cent coins.
In conclusion, the EU should act with a maximum of expediency and after careful persuasion of citizens about the advantages of the change. If successfully handled, this operation might pave the way for a withdrawal of five cent coins around 2030.
Eberhard Rhein, BrusselsAuthor : Eberhard Rhein