(This is part of a series by AFX News on the introduction of euro notes and coins in the 12 euro zone countries)
---- by Steve Whitehouse ----
PARIS (AFX) - The switch to euro notes and coins could have a mildly supportive effect on euro zone GDP growth in the fourth quarter, but the impact will be very modest and real gains from the introduction of the euro will only be felt in the long term, economists said. "With regards to the impact on real activity, we expect a marginal boost to GDP growth of 0.1 pct in the fourth quarter," said Rainer Guntermann of Dresdner Kleinwort Wasserstein.
"Far more important will be the longer-term effects of the changeover -- greater price transparency, which is disinflationary, and a greater intra-euro zone trade, which should boost activity," he added.
Stephan Rieke of BHF Bank agreed that the notes and coins introduction would contribute to growth in the fourth quarter and reduce it in the first, but overall he said there will be no great impact.
"I wouldn't expect a very strong effect but the tendency is stronger growth in the fourth quarter and less growth in the first quarter," he said.
Any positive growth effects this quarter will partly compensate for the adverse impact of much reduced consumer and business confidence following the Sept 11 terrorist attacks on New York and Washington, economists said.
This could mean that euro zone growth will actually decline quarter-on-quarter, despite the positive impact of the euro cash introduction, they said.
"The outlook for growth is more related to confidence and the other problems that we have today and not the changeover," said Rodolfo Dozio of Comit.
But the cash changeover is positive for growth in the short term for two reasons.
Firstly, the actual investment in the changeover process represents an injection of money into the economy which will support demand. And secondly, increased purchases ahead of the withdrawal of national currencies are expected to give a boost to consumer spending. "Economic growth in the second half of the year is likely to be stronger due to the demand created by the distribution and protection of the notes and coins, as well as investments in automatic teller machines," said Ulla Kochwasser of Industrial Bank of Japan. Other investment costs relate to transport, information, staff training and overtime payments, vending machines, storage and insurance.
Deutsche Bank economists estimate that the total cost of the transition to the public and private sectors will be 32.5-42.3 bln eur, equivalent to 0.5-0.6 pct of euro zone GDP.
But they said this does not necessarily translate into an equivalent boost to GDP growth.
"First, euro-changeover related activities may crowd out other activities. Secondly, the costs of the euro changeover that are incurred, and their impact on output, are spread over a period of time and are not just going to boost output in the fourth quarter of 2001 and the first quarter of 2002," they said.
There could also be a temporary negative shock to growth if the changeover does not go smoothly, with some disruption to retail activity, they said.
On balance there is likely to be a positive impact on the real economy of 0.2-0.3 pct of GDP, but this will be spread over a long period rather than boosting growth significantly in any one quarter, they said.
The consumer spending impact is expected to come from individuals' desire to use up their remaining national currency cash in shops before it is no longer legal tender.
Marks are no longer valid in German shops after the end of this year, but in other countries there is a dual circulation period of up to two months in which national currencies and euros can both be used. Once national currencies can no longer be used for purchases, consumer spending may slow for a while as people get used to having to pay for goods in euros only.
Consumption could also be boosted by the spending of hoarded national currency cash, much of it related to activity in the shadow economy. Holders of the estimated 120-180 bln eur of such cash will probably want to use it for purchases rather than having to take it in to banks for changing into euros, economists said.
Some economists estimate that the spending of this "mattress money" could boost GDP growth by up to 1.0 pct, but others are more sceptical.
"The impact of the running down of the hoarded cash before national currencies lose their legal tender status could boost euroland GDP by 0.9 percentage points, via additional consumer spending or stockbuilding," said Emmanuel Ferry of Exane.
But Deutsche Bank said the spending of hoarded cash is likely to boost private consumption by only 0.2 pct and GDP by only 0.1 pct.