Reuben M. Buttigieg
Euro confidence: Italian misinformation
The success or failure of euro adoption will depend on consumer confidence in the euro. Unfortunately, everything started off on the wrong foot in Malta due to incorrect information, particularly from the Italian media. Certain Maltese organisations have taken this incorrect information at face value and are fuelling the Maltese lack of confidence.
The reality of what happened in the first countries to adopt the euro is rather far from what is being claimed, particularly in Italy. In the first place, various economic factors led to the increase in prices in 2001 and 2002. There was an exceptionally cold winter which resulted in low agricultural production. This created inflation on high-consumption products, which the consumer extrapolated to other products as perceived inflation.
Furthermore, in Italy there was a Euro Tax, which was purposely introduced in order to meet the Maastricht criteria in time to join the euro with the first wave.
The problem was also that the euro had been turned into a political football and the media was used and abused for political objectives. One cannot but note the difference in the media's mood with respect to the euro after Romano Prodi's re-election.
The highest consumer price increase in the period, according to the Harmonised Index of Consumer Prices, was of 2.7 per cent. This compared well to the eurozone average but was slightly higher when compared to the same period in Italy during the previous year. The official statistics regarding the inflation resulting from the introduction of the euro give a rate of 0.29 per cent, which is totally insignificant.
However, there are some worrying things that occurred in Italy which we need to consider. The Marini et al study claims that Italy experienced wide jumps in sectoral prices due to allegedly speculative behaviour. The report claims that the official statistics failed to capture the upsurge of speculative behaviour, due to implicit coordination of price setters towards high price equilibria.
The report concludes that there was no significant statistical bias in Italy up to December 2001. However, following the introduction of the euro, there seems to be evidence that the inflation rate in Italy has been underestimated. Changes in median income, deflated by the official HICP, seem to be inconsistent with that reported by households. An economic explanation for this can be found in a generalised speculative behaviour in non-competitive markets and in other economic factors as aforementioned.
This report should provide food for thought for Malta. The main point of the report is that markets led by a few companies or where there is no competition could lead to increase in prices. Hence, one needs to ensure that where there is a non-competitive market, there should be an office of fair competition that works. In Malta, we already have in place such an office. However, is this office functioning the way it should? Many claims may indicate that it is functioning far from the desired level.
Another report by Adriani et al claims that a particular sector that was subject to price increases was catering, led mainly by establishments in tourism areas. This is mainly due to the fact that tourists were generally less informed and educated than locals during a changeover. The catering sector in other areas acted differently, according to this report.
Malta should question whether our tourism can sustain the increase in prices that occurred in other countries. The answer is a clear and definite no. Furthermore, the current state of the tourism sector makes the industry more dependent on the Maltese consumer.
We clearly need to boost consumer confidence in the euro and in businesses but from a national perspective, there has been too much emphasis on dual display. People have been brainwashed into thinking that dual display of prices is the way to avoid abuse. It is not in itself a solution to build consumer confidence.
If one sees what happened in the first wave countries, it is clear that those that made a success out of the euro are not those that focused everything on dual display but those that invested heavily in real customer information and education. Unfortunately in Malta the campaign launched so far is very weak and not effective enough.
If Malta does not take appropriate action immediately, we will have strong hiccups which will affect our economic growth. If the lack of confidence results in yet another economic slowdown, it will be disastrous for our business community.
Dual display will not put anyone's mind at rest. A proven way to educate consumers is to make them think in euro. We should immediately start a campaign informing how much the most consumed items will cost in euro. If you ask most people in Malta, they would not be able to tell you how much a loaf of bread will cost in euro. Many will probably hazard a guess by thinking of the price in Malta liri and converting it approximately to euro. This in itself is very dangerous as it will create perceived inflation.
Many fail to understand how perceived inflation is created. Let us take the example of Object A that costs Lm0.86. After €-day, the shop owner, using the right conversion, would price it at €2.
The consumer who tries to compare this with the original price, however, will find it easier to do the mental arithmetic by dividing by two, resulting in a price Lm1. This creates a perceived inflation of Lm0.14!
Some argue that this is why dual display of prices is necessary. In reality, it does not help at all as we saw in the first wave countries. The Maltese need to start thinking in euro and not translating from euro to Malta liri or vice versa.
Consumer education is of utmost importance. It is in the interest of consumers themselves, of businesses, as well as of government. Maintaining respective positions as a show of power will not help a smooth transition.
http://www.erremme.org
The reality of what happened in the first countries to adopt the euro is rather far from what is being claimed, particularly in Italy. In the first place, various economic factors led to the increase in prices in 2001 and 2002. There was an exceptionally cold winter which resulted in low agricultural production. This created inflation on high-consumption products, which the consumer extrapolated to other products as perceived inflation.
Furthermore, in Italy there was a Euro Tax, which was purposely introduced in order to meet the Maastricht criteria in time to join the euro with the first wave.
The problem was also that the euro had been turned into a political football and the media was used and abused for political objectives. One cannot but note the difference in the media's mood with respect to the euro after Romano Prodi's re-election.
The highest consumer price increase in the period, according to the Harmonised Index of Consumer Prices, was of 2.7 per cent. This compared well to the eurozone average but was slightly higher when compared to the same period in Italy during the previous year. The official statistics regarding the inflation resulting from the introduction of the euro give a rate of 0.29 per cent, which is totally insignificant.
However, there are some worrying things that occurred in Italy which we need to consider. The Marini et al study claims that Italy experienced wide jumps in sectoral prices due to allegedly speculative behaviour. The report claims that the official statistics failed to capture the upsurge of speculative behaviour, due to implicit coordination of price setters towards high price equilibria.
The report concludes that there was no significant statistical bias in Italy up to December 2001. However, following the introduction of the euro, there seems to be evidence that the inflation rate in Italy has been underestimated. Changes in median income, deflated by the official HICP, seem to be inconsistent with that reported by households. An economic explanation for this can be found in a generalised speculative behaviour in non-competitive markets and in other economic factors as aforementioned.
This report should provide food for thought for Malta. The main point of the report is that markets led by a few companies or where there is no competition could lead to increase in prices. Hence, one needs to ensure that where there is a non-competitive market, there should be an office of fair competition that works. In Malta, we already have in place such an office. However, is this office functioning the way it should? Many claims may indicate that it is functioning far from the desired level.
Another report by Adriani et al claims that a particular sector that was subject to price increases was catering, led mainly by establishments in tourism areas. This is mainly due to the fact that tourists were generally less informed and educated than locals during a changeover. The catering sector in other areas acted differently, according to this report.
Malta should question whether our tourism can sustain the increase in prices that occurred in other countries. The answer is a clear and definite no. Furthermore, the current state of the tourism sector makes the industry more dependent on the Maltese consumer.
We clearly need to boost consumer confidence in the euro and in businesses but from a national perspective, there has been too much emphasis on dual display. People have been brainwashed into thinking that dual display of prices is the way to avoid abuse. It is not in itself a solution to build consumer confidence.
If one sees what happened in the first wave countries, it is clear that those that made a success out of the euro are not those that focused everything on dual display but those that invested heavily in real customer information and education. Unfortunately in Malta the campaign launched so far is very weak and not effective enough.
If Malta does not take appropriate action immediately, we will have strong hiccups which will affect our economic growth. If the lack of confidence results in yet another economic slowdown, it will be disastrous for our business community.
Dual display will not put anyone's mind at rest. A proven way to educate consumers is to make them think in euro. We should immediately start a campaign informing how much the most consumed items will cost in euro. If you ask most people in Malta, they would not be able to tell you how much a loaf of bread will cost in euro. Many will probably hazard a guess by thinking of the price in Malta liri and converting it approximately to euro. This in itself is very dangerous as it will create perceived inflation.
Many fail to understand how perceived inflation is created. Let us take the example of Object A that costs Lm0.86. After €-day, the shop owner, using the right conversion, would price it at €2.
The consumer who tries to compare this with the original price, however, will find it easier to do the mental arithmetic by dividing by two, resulting in a price Lm1. This creates a perceived inflation of Lm0.14!
Some argue that this is why dual display of prices is necessary. In reality, it does not help at all as we saw in the first wave countries. The Maltese need to start thinking in euro and not translating from euro to Malta liri or vice versa.
Consumer education is of utmost importance. It is in the interest of consumers themselves, of businesses, as well as of government. Maintaining respective positions as a show of power will not help a smooth transition.
http://www.erremme.org
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