With the introduction of the euro as a physical currency in 2002, the status of legal tender of euro banknotes and coins is now laid down in European Union law and no longer in national legislation. The basic principles of the euro as legal tender are outlined in the Treaty on the Functioning of the European Union and in the Council regulation 974/98 of 3 May 1998 on the introduction of the euro. In spite of this existing legal framework and with sixteen Member States already sharing a single currency, different understandings among Member States on the concept of legal tender of the euro banknotes and coins still exist. The European Commission recently published a recommendation outlining ten guiding principles clarifying the scope and effects of the legal tender of euro cash in the euro area. This recommendation will be reviewed three years following its adoption. Leonor Machado analyses the Commission's guiding principles and finds that these give unfortunate messages on cash as a payment instrument. In addition, she strongly recommends ensuring broader stakeholder consultation on the subject in the future.
Achieving a common understanding on the concept of legal tender
The different viewpoints regarding the concept of legal tender of the euro banknotes and coins mainly result from pre-euro legal traditions in the various Member States. The importance of the concept of legal tender cannot be underestimated as it has very tangible implications on the daily life of European citizens in the use of euro banknotes and coins as payment instruments.
The European Commission considers that having a single currency as legal tender across various Member States requires a common understanding of what this legal tender means and how it must be protected. Therefore it published a recommendation on 22 March 2010 outlining ten guiding principles to clarify the scope and effects of the legal tender of euro cash in the euro area. The intention of this recommendation is to give useful guidance on many practical questions related to payments with euro banknotes and coins.
The recommendation results from extensive consultations with an ad-hoc working group including representatives of Ministries of Finance and National Central Banks of all euro area-Member States co-chaired by the Commission and the European Central Bank. The Commission will review the implementation of this recommendation three years after its adoption.
The European Commission's recommendations: there is room for improvement
The supports the objectives of the Commission to harmonise the scope of the legal tender of the euro and to provide useful guidance to the European citizens on many practical questions related to payments in euro cash. However, the EPC has serious concerns with respect to several of the related guiding principles recommended by the European Commission aimed at achieving these objectives.
Ensure the free choice of payment means
Regarding the guiding principles on the mandatory acceptance of euro banknotes and coins and that payment in euro cash should be the rule in retail transactions, the EPC considers that the means of discharging a euro payment obligation should be determined exclusively by the preferences of and the resulting agreement between the supplier and customer of a good or service. The acceptance of euro banknotes and coins as means of payment in retail transactions being the rule gives the impression that a customer or supplier, each driven by convenience or security preferences on how to best settle a payment, would be restricted in its free choice of payment means.
Fight "grey economy" activities
On the guiding principle that high denomination banknotes should be accepted in retail transactions, the EPC strongly believes that this is a contradictory and highly controversial message considering attempts of various Member State authorities to reduce the impact of illegal or "grey economy" activities and to fight against money laundering, tax evasion and organised crime in general. This particular recommendation would reverse the current results achieved in many Member States to tackle these illegal or "grey economy" activities.
Promote the shift to electronic payment instruments
The Commission furthers recommends that no surcharges should be imposed on euro payments in cash. The EPC stresses that the cost of cash distribution, authentication and protection is subsidised by suppliers and payment service providers in the pricing of their services and products. The citizen is given the false impression that euro cash is free of charge. This creates an unequal competition on cost, efficiency and user convenience criteria between cash and other payment instruments (e.g. cards, mobile and e-payments).
Furthermore, it sets additional hurdles to the stimulation of widespread technological innovation and new payment product developments within the European Union. If citizens would increase their use of cash, its overall distribution cost would have to be financed even more by the other technological payment products and further restrict their widespread development and the subsequent economies of scale in costs. This particular guiding principle contradicts the Lisbon Agenda (promoted by the Commission itself) for making the European Union the most efficient and modern economy in the world.
Respect Member States' rounding rules
The Commission recommends that Member States refrain from adopting new rounding rules which would presumably affect the legal tender of 1 and 2 euro cent coins. It goes without saying that those Member States that have introduced such rounding rules took the decision after broad consultation of and consensus among coin cash cycle participants, and end users such as consumers and businesses. All parties involved in these Member States considered that the societal cost of maintaining the circulation of 1 and 2 euro cent coins exceeded the benefits. Even though the circulation of such coins is thus rather limited in these countries, it does not indicate that these coin denominations have lost their legal tender status altogether. As for the Commission's statement that the rounding rules may lead in some circumstances to a surcharge on cash payments, one must not forget that the buyer is also just as often granted a discount by these same rounding practices.
The message of the Commission goes against the aspirations of future euro zone communities to improve the efficiency and cost-effectiveness of coin handling, hence bringing societal benefits to the general public. The planned review of the recommendation in three years' time should take into consideration the consensus stakeholders have reached on this subject in various Member States.
Moving forward, the Commission should ensure proper stakeholder involvement
Within the current climate of budget constraint affecting all parts of society, the EPC feels that all options should be left open to each individual person, organisation or Member State on how to reach the most effective possible use and distribution of euro cash as payment instrument.
The EPC regrets that the Commission has restricted its consultation on the guiding principles outlined above to representatives of public authorities. As euro cash affects every European citizen in various ways, the Commission should ensure proper involvement of all relevant stakeholders including consumers, retailers and payment service providers when reviewing these guiding principles in three years.
Leonor Machado is the Chair of the EPC Cash Working Group.
For further information, visit the European Commission web site http://ec.europa.eu/economy_finance/articles/euro/2010-03-22-legal-tender-euro_en.htm
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