Some Irish people did remark that it was a pity to lose the attractive designs on the Irish banknotes, but during in-depth interviews with psychologists, others liked the new notes. One said it was like being ‘a child at Christmas’, another that it was like having Monopoly money.
This reaction partly stemmed from the fact that of all the countries joining the single currency only Ireland had a previous currency with a unit value higher than a euro. An Irish pound was worth 1.28 euros. So people marvelled at these new high numbers on their salary slips. For a fleeting moment, they felt richer. Until, that is, they went shopping, where everything looked more expensive. Some people suspected that shopkeepers were taking the opportunity to rip them off, although in fact there was little evidence to back up this suspicion. The real problem was one most of us are familiar with if we travel overseas: it’s just difficult to calculate whether prices in an unfamiliar currency are fair.
One technique that Irish people used was to learn a few reference prices along the spectrum and then guess prices in between. Another strategy – you may have used it yourself – is to learn the price of one thing, let’s say a pizza, and then apply it to anything else you purchase. So, while it may be hard to calculate quickly whether the scarf you want to buy is good value just by converting x currency to y currency, you find you can compute the sums if you think to yourself, how many pizzas would that scarf set me back?
While the Irish, along with other people in the Eurozone, struggled a bit to adapt, the new coins and notes became a little more familiar every day. However the old currency still holds a nostalgic draw for some Eurozone citizens. In 2014 sales of gold and silver reproductions of the old Italian lira coins and commemorative books on the currency amounted to more than 25 million euros.22
In countries that hadn’t adopted the euro, where of course there were no public information campaigns, dealing with the currency has not been as easy. The Swedes didn’t have to use the euro on a daily basis, but the fact that many of their close European neighbours had joined the single currency meant some familiarity with the new money was important. How then would they cope with it?
The first experiment carried out by a group of researchers as part of a study in 2002 was a simple one. They asked people in the Swedish city of Gothenburg to look at a list of prices of magazines, bus fares and monthly rent expressed either in the local Swedish crown or in the euro. Then people were asked to rate each price on a five-point scale ranging from very cheap to very expensive. Now the cost of living in Sweden does tend to be higher than in most European countries. But it was not that which led the Swedish respondents given the amounts expressed in euros to say that prices were cheaper. No, they thought euro prices were lower for one simple reason: the numbers on euro notes were smaller than the numbers on Swedish crowns.23 People were being fooled by the fact that a two-euro bus ticket sounds cheaper than a five-crown bus ticket, just because two is a smaller number than five. People were just guessing, rather than bothering to do the calculations, but would they take sums more seriously if they were asked to ponder the possibility of actually moving to a country? Or would they still be mesmerised by the numbers on the notes?
Next time round, the Gothenburg residents were asked to consider the following scenario. They had been offered a good job in another EU country known to have friendly people and a pleasant climate. It was surely an attractive prospect. But of course, before moving, people would want to consider the cost of living.
The prices of various items including a cinema ticket, a haircut, a piece of cheese, a vacuum cleaner and a queen-sized bed (yes, a rather random selection of objects) were given to the participants in various made-up currencies. Did they think these items were more expensive in these currencies than the prices they were used to in Sweden or not? With a bit of effort to calculate exchange rates, people could have worked it out for real. But instead they tended to assume that if the price was expressed in a high-number currency – something like the old Italian lira – then the item was more expensive in that country than at home.
This effect has been dubbed the ‘euro illusion’.24 (It’s a variant on the broader ‘money illusion’, a phenomenon first noticed by the economist Irving Fisher back in 1928.) What happens is that we can’t help but focus on the actual numbers printed on banknotes and this skews our attention away from real values. So why do we fall into this trap?
For a start, as we’ve found, thinking this way is easier than doing complex calculations. But there’s also the issue of what’s known as psychological salience. This can take various forms. It might be that something stands out from the crowd, such as a single red tulip in a sea of white flowers, in which case our attention is drawn to the exceptional thing. But in another case – one angry face in a crowd of happy people – the salient thing is not that the angry face is the exception (we don’t tend to notice one happy face in a crowd of angry people) it’s that our minds are attuned to notice anger in particular. We do that because anger can spell danger for us. In the case of money, what is particularly salient is the big number. We’ve been taught since childhood to equate big numbers with more money. So – using the old Italian lira as an example again – when I visited Rome in the mid-1990s and a glass of prosecco was advertised as costing 10,000 lira, my immediate response was, ‘What?!’ The number in front of me dominated my thoughts. And only later, perhaps after I’d decided not to bother, did I work out that 10,000 lira was less than £3, which was reasonable enough for a glass of fizzy wine at a café in a sunny piazza.
Back among the Eurozone countries, there was another difficulty for some people. In Austria, Portugal and Italy, half of those people questioned in polls said the change was still causing them problems a year later.25 And what they were struggling with was what’s known as the accordion effect – that two prices in euros were harder to compare than two prices in their old currencies, because in the new currency the numbers were much closer together.
Think about it: the difference between one and two euros doesn’t seem that big. But 20,000 lira seems a lot bigger than 10,000 lira. To revert to my example above (and this time imagine I’m Roman born and bred), the cost of a glass of prosecco expressed in euros not only seems cheaper than it was in lira, but having two glasses doesn’t seem so extravagant because doubling such a small number seems pretty trifling.
Something along these lines may have happened in another country that joined the single currency in 2002. Every September, the National Collection for Mentally Handicapped Persons would go door-to-door in the Netherlands asking for donations. In a study conducted in three villages in the September after the adoption of the euro, giving rose by 11 per cent.26 Income levels remained the same, and it’s unlikely that compassion had suddenly increased, so the probable explanation was the new currency.
It seems people simply weren’t prepared to put in the cognitive effort to calculate the exact amount in euros, which would equate to the amount they used to give in Dutch guilders. Instead they roughly estimated the sum, and fortunately for the charity this meant they rounded it up a bit. Incidentally, the next year donations to the charity rose again, but this time by 5 per cent. Perhaps people were getting better at their calculations.
Anyway, the picture is clear. The change to the euro messed up people’s ability to exert mind over money. Unhitched from the familiar moorings of their old currency, they were, temporarily at least, at sea with their new currency, rather in the way we all are when we use foreign money. In the great scheme of things it probably didn’t matter all that much. People were not so muddled as to go on wild spending sprees or demand massive pay hikes. The impacts were at the margins and in time people adapted. But even so, any change in the physical manifestation of money causes some psychological disruption.
I close this section by positing a possible strategy for coping with currency change. Be warned it involves being grumpy, so it might not appeal to all.
The basis for my idea is this: psychologists have demonstrated that when people are happy
