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The effects of changing currencies

Christopher Werth Jan 8, 2011

The effects of changing currencies

Christopher Werth Jan 8, 2011


Tess Vigeland: The American consumer has a lot to deal with this year: unemployment, foreclosure. But at least we know the dollar is and will remain our currency.

Not so for the former Soviet Republic of Estonia, which converted to the Euro on January 1st. We wondered what’s it like to swap out a currency everyone knows and loves for a strange new one. Christopher Werth has the story.

Christopher Werth: Nine a.m. on a weekday morning, and some two dozen students are crammed into this neat, modern classroom in central Tallinn. Today’s lesson focuses on exchanging Estonia’s old currency, the Kroon, for its new one, the Euro.

As a student reads aloud from a worksheet about the changeover, she stumbles over a word.

Student: Um, Jagatud.

Teacher: Stop, stop, stop.

“Jagatud?” she asks. The teacher writes the word on the board. “Jagatud,” or in English, “divide.” These students and everyone else in Estonia will now have to divide the old prices of things by 15 to get a rough estimate of their cost in Euros. To be precise, it takes 15.646 Kroons — the old currency — to make one Euro.

Natalia Fetissova and her family are trying to figure out what it will mean for them.

Natalia Fetissova: I feel that a bad time is coming, and I don’t know what to expect.

Fetissova fears the switch in currencies will lower the value of her paycheck. And to calm those fears, the Estonian government handed out calculators designed to convert Kroons to Euros so that everyone will know exactly what they’re getting.

As she sets the table for dinner, Fetissova plugs in her monthly salary of 10,000 Kroons, or about $800.

Fetissova: And it is, just let me see, 639 Euros, you see? It is not enough.

This is what economists call the “money illusion,” a phenomenon also noticed in other European countries that have adopted the Euro. It’s where the amounts used in the old currency — in this case 10,000 Kroons — are compared to the numbers in the new currency — just 600 Euros. And because the new number is so much smaller, people feel like they’re earning less.

Fetissova: It sounds strange, you see?

People are also concerned the change to the Euro means higher prices. Businesses are more likely to round prices up than down.

As her daughter plucks at the piano after dinner, Natalia Fetissova uses the calculator again to convert the price she pays for a bus ticket, 10 Kroons.

Fetissova: And it is 64 cents.

She says she thinks the cost of the ticket will just be rounded up to an even 1 Euro, which would be an increase of over 50 percent. And she fears similar price hikes at stores like this Maxima supermarket, where staffers have busy changing price tags. Erkki Erilaid is the company’s spokesman.

Erkki Erilaid: So the big sign is going to be in Euros, and the little one is Kroons.

The government in Estonia hopes to get stores like this to put a sign in the window showing they’ve agreed not to round prices up. But no matter how much is done to reassure shoppers, Maris Lauri, an economist at Swedbank, says Estonia’s switch to the Euro could initially be bad for consumer spending.

Maris Lauri: People maybe will not spend as much because they will sort of calculate everything.

That is, until the effect of the “money illusion” wears off. By then, she says, people will realize that joining the Eurozone was good for Estonia.

But back at the supermarket, company spokesman Erilaid holds a 100 Kroon note in front of him and says he’s going to miss the old currency.

Erilaid: It is more beautiful than the Euro.

For many Estonians, the Kroon is a symbol of the country’s hard-won independence. It was only introduced about two decades ago after Estonia broke away from the Soviet Union.

Erilaid: At that time, I was young and rebellious, and it was a very interesting time.

Werth: So you’re going to be sad to see them go?

Erilaid: I don’t know, sad is not the right word. But of course, I’m not going to change everything.

Werth: You’re going to keep some?

Erilaid: Yes of course, to look and put, ‘Oh OK, nostalgic.’

He squeezes the 100 Kroon note up to his chest like a treasured, old friend and says he’s going to hold on to a few of them, for the memories.

In Tallinn, I’m Christopher Werth for Marketplace Money.

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