The preparation of euro banknotes

Jean-Michel Dinand*


Experience in individual European countries suggests that the process of printing and issuing a new banknote is a lengthy one, comprising a considerable lead time before a new banknote series is actually ready to be introduced in order to replace a previous one. The task of the European Monetary Institute (EMI) concerns a series of seven denominations of banknotes all of which will be put into circulation on the same day in the participating countries. The task of preparing, for a group of countries participating in a Monetary Union, the substitution of all the banknotes denominated in their national currencies by a series of euro banknotes is a far more extensive undertaking than we are used to, both in terms of timing and in terms of potential problems to be addressed. As an indication, there were 12 billion banknotes in circulation at the end of 1995 in the fifteen Member States. In 1995 6 billion new banknotes were printed for EU central banks.


1 THE FRAMEWORK FOR THE ACTIVITY OF THE EUROPEAN MONETARY INSTITUTE'S WORKING GROUP ON PRINTING AND ISSUING A EUROPEAN BANKNOTE

Under Article 105a of the Treaty on European Union (commonly known as the Maastricht Treaty), the European Central Bank (ECB) has the exclusive right to authorise the issue of banknotes within the future Monetary Union. The ECB and the national central banks may issue such banknotes. The technical preparation of the new banknotes is supervised by the EMI in accordance with Article 109 f of the Treaty.

The changeover scenario adopted by the European Council in Madrid in December 1995 provides for the production of euro banknotes to start in 1998 (as soon as possible after the decision on which Member States will participate initially in the euro area and no later than 1st January 1999), and for the banknotes to be put into circulation by 1st January 2002 at the latest.

Given the long lead times required for producing euro banknotes, work on their production started in 1992, under the aegis of the Committee of Governors of the Central Banks of the Member States of the European Economic Community (prior to the creation of the EMI). In mid-1992 the Governors of the EC central banks created a Working Group on Printing and Issuing a European Banknote, made up of banknote experts from all EU countries. The experts were drawn both from the central banks' printing works and from the cash departments of the central banks, so that both production and security technology as well as the logistical side would be well covered.

When the EMI was created in 1994, the Working Group continued to function under the aegis of the EMI. Since a large number of different problems need to be tackled simultaneously using specialised know-how, the Banknote Working Group functions with several sub-groups, known as task forces, which are staffed by specialists in the relevant technical fields. The Chairman of the EMI's Banknote Working Group is Mr. Alex Jarvis, General Manager of the Bank of England Printing Works.

The right to issue euro coins lies with the Member States, although the size of the issue requires the approval of the ECB. The EU Finance Ministers have entrusted the handling of technical problems associated with the production of euro coins to the Mint Directors' Working Group, whose members are the heads of the mints in the EU countries. The Mint Directors co-operate closely with the EMI's Banknote Working Group.


2 UNDERSTANDINGS REACHED SO FAR

A number of issues related to the preparation of euro banknotes have already been resolved by the EMI Council.

2.1 Banknote/coin boundary

A consensus has been reached with respect to the banknote/coin boundary. In agreement with the ECOFIN Council and the Mint Directors' Working Group, the highest value for coins will be EURO 2 and the smallest denomination of a banknote will be EURO 5. With respect to the sequence of banknotes and coins, the agreed working assumption is the sequence 1 : 2 : 5, yielding eight coins from EURO 0.01 to EURO 2, and seven banknotes (EURO 5, 10, 20, 50, 100, 200 and 500).

2.2 Design of the euro banknotes

As part of its preparatory work for Monetary Union, in February 1996 the European Monetary Institute launched a design competition for the seven denominations in the euro banknote series (EURO 5, 10, 20, 50, 100, 200 and 500). The competition will last for seven months and will close in September.

Two design themes have been selected. The first theme, entitled "Ages and styles of Europe", reflects Europe's cultural heritage and is a traditional theme. The designs will represent architectural styles on one side of the banknote, and portraits of ordinary men and women based on European paintings on the other side. The second theme will be for a series of banknotes with an abstract/modern design.

For the "Ages and styles of Europe" theme, the features to be depicted on each of the seven banknote denominations (EURO 5, 10, 20, 50, 100, 200 and 500) represent a specific period of European cultural history (Antiquity, Romanesque, Gothic, Renaissance, Baroque, the age of Iron and Glass architecture, the age of modern 20th century architecture).

Technical and logistical reasons tend to favour banknotes which are completely uniform. This option would be preferable for reasons of protection against counterfeiting as well as of easy handling in payments: it would undoubtedly be easier to become familiar with banknotes which have completely uniform illustrations than with banknotes having different features (even if the differences are only slight).

According to opinion polls in four countries, public opinion in those countries favours identical banknotes. In the Netherlands over 50% of respondents expressed a preference for a uniform design of euro banknotes. Around one-third preferred a national feature on one side of the banknote, such as the national flag, a portrait or a national monument. In Germany, France and Belgium between 55% and 60% of respondents would prefer common identical banknotes. On the other hand, CNF banknotes might be better accepted in some other countries on account of their national element.

2.3 Security features

The euro banknotes will undoubtedly have a wide circulation and will therefore be subject to even greater attack by counterfeiters than any one of the existing European national currencies. For this reason, the euro banknotes should be provided with the most highly developed security features.

These security features should be able to assist the various user groups to identify counterfeits easily. These user groups are the general public, the vending and banknote processing machine industry, the banking sector and the central banks themselves.

A number of advanced security features will be included in the euro banknotes, such as:

The security features will be incorporated into the designs, in such a way that they achieve the maximum possible security effect.


3 BANKNOTE PRODUCTION: THE ROLE OF PRINTING WORKS IN THE COUNTRIES PARTICIPATING IN THE MONETARY UNION

The notion of decentralisation is laid down in Article 12.1, third paragraph, of the Statute of the ESCB/ECB. This article reads as follows: "To the extent deemed possible and appropriate [ ... ], the ECB shall have recourse to the national central banks to carry out operations which form part of the tasks of the ESCB".

The decision as to whether the printing of banknotes should take place in a centralised or decentralised manner is a policy matter which will be agreed upon within the Governing Council of the ECB and which may be influenced by various considerations, of which efficiency may be one.


4 TIMING OF THE INTRODUCTION OF THE NEW EURO BANKNOTES

The EMI is carrying out preparatory work on the practical aspects of launching the euro banknotes. Since this is an area of crucial importance for the credibility and acceptability of the single currency, the EMI is maintaining close collaboration with the other competent bodies (Monetary Committee, Mint Directors, European Banking Federation, etc.).

The EMI examines the timing, technical feasibility, costs and public acceptability of the changeover in the document it published on 14th November 1995 ("The changeover to the single currency"). The EMI's proposal as approved by the European Council stated that:

By 1st January 2002 at the latest, euro banknotes and coins will start to circulate alongside national banknotes and coins. At most six months later, the national currencies will have been completely replaced by the euro in all participating Member States, and the changeover will be complete. Thereafter, national banknotes and coins may still be exchanged at the national central banks.National banknotes and coins, which will gradually disappear from circulation, will lose their legal tender status and the euro ones will become the only banknotes and coins to have the status of legal tender within the euro area.


5 A LIMITED PERIOD OF CO-CIRCULATION

The EMI assumes that:

The substitution process between national and euro banknotes will involve the interplay between three main factors: the behaviour of the public, the adaptation of the market infrastructure (ATMs, for instance), and the decisions/actions of the issuing authorities.

The EMI has mainly examined the latter two factors, viz. the capacity of market operators to quickly reprogramme or recalibrate banknote and coin-operated machines (ATMs, etc.) and the ability of central banks to withdraw old banknotes and coins from circulation. These points of view suggest that a co-circulation period of between three and six months will be necessary.


6 SUPPLY OF AND DEMAND FOR THE NEW CURRENCY

On the supply side, that is to say on the central bank side, the problem is two-fold; the cash departments of central banks will need to perform two tasks:

- supply the new euro banknotes and coins that are needed for E-day. This implies careful planning of printing, minting, distribution and storage before E-day;

- physically withdraw the old national banknotes and coins.

The withdrawal, authentication and disposal of old national banknotes and coins will be a large-scale and time-consuming operation. National central banks (NCBs) have never been faced with such an operation, except perhaps the Deutsche Bundesbank in 1990. But the Deutsche Bundesbank acted in a different context: in 1990 the Deutsche Mark was already quite familiar and widely used in the former GDR, while the Ost-Mark coins remained in use as tokens for a few months after 1st July 1990.

On the demand side, money handlers (banks, retailers, consumers and machine manufacturers) have stated their preference for a short co-circulation period - in any case not exceeding six months - in order to minimise the additional costs and confusion of co- circulation.

The central banks are reasonably confident that, when the time comes, they will be able to do the job in less than six months. If need be, exceptional measures will have to be taken in order to remain within the limit of six months. This could be achieved, for example:

- by additional capital investment;

- by increasing staff numbers or the number of shifts on a temporary basis;

- or by streamlining the procedures for handling the withdrawn currency (especially old national coins).


7 ISSUE AND POST-ISSUE HANDLING

The issuing and post-issue handling of the future banknotes has not yet been defined in full. However, keeping in mind the principle of decentralisation, it is unlikely that the ECB will have its own technical departments (i.e. vaults, Distribution Department, Banknote Processing Department and Destruction Unit). Rather, the NCBs will continue to distribute banknotes and carry out the related operational functions.

Two decisions have been taken in this area:

In fact, Member States with large tourist inflows (e.g. southern Europe) will receive a comparatively high proportion of banknotes issued in other countries. All other things being equal, this will have the effect of lowering the annual orders for new banknotes placed by their central banks with their printing works, thus reducing - or in an extreme case eliminating - their workload and possibly causing social problems.

One way to deal with this problem would be to redistribute banknotes in bulk (i.e. without sorting them according to national origin) to locations in northern Europe. This procedure is commonly followed in a number of countries, e.g. the United States, where the Federal Reserve System corrects imbalances caused by the migration of banknotes to certain states (California, Texas, Florida, etc.).


One thing seems certain: euro banknotes will give political visibility to Economic and Monetary Union. The introduction of euro banknotes will be the most relevant signal to the public that the euro area has been created.

People sometimes ask: "How strong is the possibility that in five years' time banknotes will be replaced by the electronic purse?"

The answer might be as follows: for 250 years in Europe, banknotes have performed their essential economic functions reliably and successfully. Hundreds of millions of times a day, in millions of places, banknotes make payment operations possible. The bulk of these payments cannot be transferred economically to a cashless payment system. Banknotes are gaining a market share in the EU: banknotes in circulation represented 6% of GDP in 1995, compared with 5% in 1991. The increase is particularly obvious in three countries: Germany, Spain and Italy. The banknote will retain and increase its great economic importance in the future because its simplicity and cost cannot be improved upon by any other means of payment.

08-05-1996


* Rapporteur of the Banknote Working Group, General Secretariat, European Monetary Institute.


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