By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.
In late 2001, German banks sold Euro Starter Kits—sealed plastic pouches with €10.23 in coins. One of many steps in the arduous process of weaning Germans from their D-Mark. I was in Germany on business at the time and bought a Starter Kit as souvenir. I still have it. It’s in the back of a drawer, next to a D-Mark coin. And that coin is part of a vast phenomenon: 13.3 billion Deutschmarks are still missing ten years after the euro made it into German wallets. 163 D-Mark per capita. But now people see a reason to hang on to them.
While part of it is stashed in the back of drawers or rusty boxes in Germany, a good part appears to be in other countries. Guest workers took their savings home in cash, which their families kept as hard currency. A smart move in a country like Turkey where, after decades of torrid inflation, the government revalued the lira in 2005 at 1,000,000 lira to one “new lira.” Which put an end to multi-million-lira döner sandwiches. And in the Balkans, the Deutschmark was the primary currency in the 1990s. When I was in Sarajevo in 1997, even hotel bills had to be paid in cash Deutschmarks.
For those who squirreled away Deutschmarks, it’s comforting to know that notes can still be exchanged for euros at any of the branches of the Bundesbank. But the numbers are dwindling. In 2010, DEM 180 million were exchanged. In 2011, it was down to DEM 140 million.
Though people might be clinging to their marks, the euro so far has been a solid currency—despite its birth defects. In 1999, €1 bought $1.07. It then zigzagged up to $1.60 in 2008. Even in its crisis-battered condition, it’s at $1.30, up 21% from 1999. Inflation in Germany during the euro decade has been a very moderate 1.6% per year on average, or 17% for the decade—considerably lower than during Germany’s post-reunification years.
Yet German consumers have been grousing about inflation ever since the euro’s introduction. That gap between reported inflation and perceived inflation became such a concern, that the Statistische Bundesamt, which issues the inflation numbers, studied the problem (PDF report). Most prominent among its conclusions: the frequency of a purchase impacts the perception of inflation.
Buying a car for example. In a given year, only one in 20 German households bought a new car. The remaining 95% of households did not experience price changes in new cars. Thus, the price increases didn’t enter into their perception of inflation though they have a significant weight in the basket of goods measured.
Items consumers buy on a daily basis have seen higher inflation. Food, electricity, gasoline, diesel, heating oil—the infamous non-core items—rose by 35% over the decade. Electricity alone was up 66%. Due to their daily presence in people’s lives, they disproportionately impact the perception of inflation.
However, the report confirms a popular suspicion that eating and drinking establishments took advantage of the new euro for the first two years by rounding up. Smaller items—an espresso, for example—could see a jump in price of as much as 100%. Thus, an espresso drinker would perceive a painful level of inflation though espresso has an insignificant weight in the basket of goods. Price increases in restaurants leveled off after the initial spike, and for the decade as a whole, they amounted to only 18%.
So, Germans have nothing to grouse about. For the first and perhaps only decade of its life, the euro has been a good currency in the German sense—though it might be wreaking havoc in other countries. And the billions of missing Deutschmarks? People might be hanging on to them more tightly than ever: even Beatrice Weder di Mauro, member of Germany’s Council of Economic Experts, confirmed that a breakup of the euro in 2012 “cannot be excluded.” Oops. For more on this and the simmering French rebellion against the German dictate, read…. French CEO About Ratings Agencies: ‘We Have To Shoot All These Guys’
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Sir;
The phenomenon described sounds suspiciously like the effects of Metricization anecdotally heard by myself from family members back home in the UK several years ago. As for old D Marks floating around; I remember playing with US Confederate money as a kid when we lived in Petersburg Virginia lo these many years ago. How much of human economic behaviour results from simple sloth and inertia is beyond me. Happy New Year.
Devil’s in details: what about german wages? Isn’t it true that back in 2003, if my memory serves, a law was enacted so that workers earning €400 wouldn’t pay taxes or social contributions? That hasn’t changed so far, as far as I know. That would help explain why regardless of very low inflation the number of poor people is increasing in Germany.
Germans do have something to grouse about, just not about the currency unit.
In truth that measuring inflation from the price of cars and other semi-luxury items is a scam. If we’d measure inflation by the price of computers alone we’d be in a serious case of deflation. Obviously this kind of “official inflation” measure is far from the “bread basket” concept that it should analyze.
You mention Germany but it has been a generalized problem in all the eurozone. In the 90s I used to make large purchases in the supermarket by some 1000 or 2000 pesetas, now being very careful I cannot get a smaller (two plastic bags) purchase under 35 €uros (almost 6000 pesetas originally). And never mind the tobacco (I had to quit smoking so abusive were the EU-set prices), electricity and small items like a coffee indeed.
So judging by the supermarket basket, prices have risen at the very least 200% and more in the range of c. 500%. That in 10 or 12 years alone.
Germans are lucky in fact in this matter. But no wonder that competitiveness has decreased: you can’t work for less than you need to eat (and such).
Can anyone explain why Europeans voted in the Euro in the first place? It always looked to me like a businessman and bureaucrat scam to me and it gave Germany what Hitler wanted back in 1940 and without the shooting.
Europeans did not “vote in” the euro: there was no referendum. There were some referendums for the so-called European constitution, which was rejected in several states and looked very bad, but in the end the governments signed a treaty and removed the name “constitution” and got away with it.
But the common currency is not a bad idea at all for most practical purposes, what is a bad idea is to base it on the Deutsche Mark model and the particular economic interests of Germany, specially when controlled inflation had worked well enough, allowing European economies to keep some competitiveness in the every day more globalized market. Using the DM model was doomed and that is what must be corrected (and if Berlin does not like it, they know where is the door).
I believe that the DM is the only pre-Euro currency that can still be exchanged. So at least the Germans can claim the DM retains value.
And you can lower the 13.3 billion by the 20DM sitting in my old travel wallet.
My guess is that all the old EU currencies can be exchanged for euros on their respective central banks. Pesetas can still be exchanged for sure (even small coins).
i’m in berlin atm, while walking around I noticed a weird store selling old sneaker models, I think. Nothing special, the schönhauser allee has lots of weird stores. This one had a massive sign on the door: “bei uns can sie bies 28/2/2012 noch mit deutchmark bezahlen” (you can pay us in dmarks until 28/2/2012.)
Reuters had a headline the other day about how three out of four Germans still mentally convert to dmark.
I was in Germany this summer when the euromess started to move from obscure bond markets and bank balance sheets to news/tv friendly stock markets. It’s hard to describe how much gold related nonsense the tabloid headlines can scream. If you visit a supermarket once in a while you know which papers are popular and just how much better they must sell.
Odds are that if the Germans had had a referendum on the constitutional treaty they would have voted against as well.
These are the voters Merkel, and her coalition partners, are afraid of when they do the things they do. Or more accurately refuse to do the things they refuse to do. This isn’t like some countries where economic policy is set for the rich by the rich.
Food, electricity, gasoline, diesel, heating oil—the infamous non-core items—rose by 35% over the decade. Electricity alone was up 66%.
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What was the post-war average inflation per decade for these non-core items, so we can compare?
It seems, furthermore, that these non-core items are more relevant for the 99% and the less frequently purchased items, like Greece sovereign bonds and vacation houses on Crete, are more relevant for the 1%.
Again, it’s inflation worries for the 99% and deflation worries for the 1%.
Finally, a question common for the 100%: Do you concern yourself more with food, heating oil, electricity getting more expensive or the price of a coffin, a very infrequently purchased (hopefully only once in a lifetime) item?
I sold all my Deutschmarks but kept my Belgian Francs. On t’other hand, I still have rather a lot of the currency that Hitler had printed for the then forthcoming German occupation of India.
In my town, the kind of basic, inexpensive food that I eat, has doubled and tripled in cost, over a decade or so. Both prices have increased, and quantities have and decreased. People who buy manufactured food have also been hit with sharp declines in quality.
The “consumer” price index has risen very moderately.