Real or not, euro price hikes trouble Estonians

By bne IntelliNews October 12, 2010

Steve Roman in Tallinn -

It's a crisp, autumn morning at the outdoor Jaama Turg market in central Tallinn. Saturday bargain hunters are weaving their way through the stalls, searching for the best deals on pork, butter and leather boots. At one table, bundled up, 70-year-old Nadezhda is selling eggs. A hand-written cardboard sign displays the price, first in Estonian kroons then in euros - the country's new currency as of next January 1. She lists the euro price because the law requires it, not because she's a fan. Like many people here, she's dreading what the euro will bring.

"We don't believe in the euro," she says without hesitation, pointing to the huge jump in prices that, according to common wisdom, the currency's arrival will inevitably cause. "We're poor, and now we're going to be even poorer. My pension is EEK4,000 [€255] a month and I'm spending 2,000 on my apartment. So what's left over for food? Nothing."

In her fear of a euro-related price hike, she's certainly not alone. In fact, September survey data from the Ministry of Finance shows that a full 68% of Estonian residents are worried that the changeover will trigger a general price increase. And it's this concern, far more than any other factor, that accounts for the negative attitude toward euro adoption held by 42% of the population, according to the TNS Emor pollster.

In a country that's just returning to growth after last year's heart-stopping 14.1% plunge in GDP and with unemployment standing at a staggering 18.6% at the end of June, you can't blame the average consumer for being more than a little jittery about this looming, euro-related price increase.

The problem though is that it's mostly a myth. Numerous studies in other new Eurozone countries have found that, after other inflationary factors were removed from the equation, euro adoption could only account for a 0.1- to 0.3-percentage-point price rise, and the same is expected here (though compared with the 0.8% Consumer Price Index increase that the country went through between August and September, it's hardly a drop in the proverbial bucket).

Perception gap

So why do Estonians think their wallets are going to take such a big hit come January? The reason, says Marje Josing, head of the Estonian Institute of Economic Research, is that they're tuned into the popular perception from countries that previously adopted the euro, where most people have distorted ideas about how much inflation their changeovers actually caused. Researchers refer to the phenomenon as the "perception gap."

"It's psychology," she explains. "If some prices rise and some decrease, people will only be looking at the prices that are higher."

It's a phenomenon that's hard to avoid, especially when prices for a few noticeable everyday items like a cup of coffee actually do go up when the euro comes in, as happened in Italy. And the effects are lasting. "[In] Germany, customers still believe that it's because they have euro that prices are higher than they were in German marks, even though inflation in Germany was very low."

Josing said that, unfortunately, it looks like prices in Estonia will rise in January, but even though the culprit will be world market forces, the euro will get the blame. "Even if only five prices end up higher in Estonia, Estonian consumers will say it's because of the euro. There's nothing you can do."

But tackling the perception gap is exactly what Ingvar Bärenklau, the Ministry of Finance's euro communication project manager, is tasked with doing. As head of the ministry's "Hello Euro" campaign, which uses everything from media adverts to stands at shopping malls, it's his job to inform the public about the coming euro and allay fears about rising prices. Part of that effort is telling them about the hard line being taken against would-be price gougers. "Every trader, every retail company already has to display parallel prices in euros and in Estonian kroons, and there's no reason to change the prices from January 1," he says. "Of course, this is a free economy and the state cannot tell the private sector that they absolutely cannot change their prices, but we have another measure to ensure that companies won't use the euro introduction for artificial price hikes."

The measure he was referring to is the Fair Price Agreement, a contract signed by over 400 companies in Estonia, including most major retailers, publicly pledging not to raise prices unjustifiably.

Meanwhile, the Consumer Protection Board will be carrying out inspections to make sure businesses follow the rules: no arbitrary price raising and no rounding prices up by more than a euro cent. Violators risk fines and worse - bad press.

Image concerns

Despite the finance ministry's efforts, the popular idea of a euro-triggered price hike seems too entrenched to overcome, and it looks like the new currency is destined to take the rap for any bad price news at the beginning of 2011. Even many of the Estonians who favour the euro take it for granted that it'll cause prices to jump. In fact, the euro's pending arrival is already being blamed for food price increases in September.

In the end though, since the euro is coming like it or not, it's tempting to ask whether the negativity toward the euro really matters. "I think it does a little bit, because it would be good if consumers were more satisfied with the new money, if they took it as something normal and logical, and not something bad," says Josing.

It's this level of satisfaction with the euro that the current government, who have staked so much of their reputation on euro adoption, will no doubt be watching in the weeks leading up to the general election in March.

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