The “Teuro” Dissected

Did prices really go up when the Euro arrived? The public mind, or at least the dominant media discourse, says they did. The inflation indices say they didn’t, or at least the prices that did go up were outweighed by the ones that went down. This paradox may have been solved. Erich Kirchler, of Vienna University’s Institute for Economic Psychology, tells Der Standard how.

Kirchler formed three representative groups of volunteers, and showed them prices in Schillings, then in euros. One group’s price was exaggerated by 15%, one reduced by 15%, and a control group saw correctly converted prices. All three groups were convinced the prices had risen…yes, including the second group. When he repeated the experiment with wages, rather than prices, the guinea pigs were convinced the opposite was the case.

He theorises that two well-known cognitive biases are at work – irrational perception of risk (the difference between accepting €10 now, or a 90% chance of €90 later) and the salience heuristic (unrepresentative but extreme events are over-perceived).

I was in Austria for the introduction of cash Euros, and I recall not so much that prices went up, as that the standard sums of money one withdraws from ATMs (20, 50, 100 etc) were suddenly considerably more and hence it was easy to spend more. Everyone was convinced that prices went up, though. And the German-speaking press had been hammering the word “Teuro” (roughly: “dearo”) into the meme-pool for months before the switch. (Especially, of course, Bild Zeitung and the execrable Krone..)

11 thoughts on “The “Teuro” Dissected

  1. Of course inflation did not go up: you just need an inflation basket that proves it.

    So, what’s in this basket: flat screen TV’s. Their prices went down. Likewise the prices for luxury cars. Gosh, has this Lexus become cheap. And because the Lexuses became cheap, the rise in bread, milk and butter are negligeable.

    Inflation, touching the average Joe, should be measured against the average pint you get in your pub, but unfortunately it is not.

  2. I work for a German department store – a retail company with an extreme wide range of products.
    Trust me: We did NOT generally raise our prices. Generally the opposite was true, because of the exact DM-Euro-exchange-rate of 1,95583:
    An item originally priced at 1,99 DM would typically now cost 0,99 € (which is about 2% less than 1,99 DM).
    As I KNEW we had been fair on our customers, it was an extremely frustrating experience that our customers just ASSUMED our prices had risen and acted accordingly.

    By the way:
    Our product range with the highest price increases since the introduction of the Euro are – newspapers. (with retail prices that – in Germany – are fixed by the newspaper companies
    and can not be changed by the retailers).
    As the newspapers are among the worst price-raisers I find newspaper articles condemning the “Teuro” extremely annoying.

  3. Good, that’s the feeling I had as well, though I was a bit wary of expressing it as everyone in France seem convinced the price went up a lot due to the switch to the euro 🙂
    It’s probably been the case for some things (like bread) but those expenses are such a tiny slice of the households’ spending compared to car, transport, housing that it hardly matters…
    Also some people seem to have forgotten inflation existed even _before_ the switch to the euro, so if the price of certain goods keep going up now, the euro might not be the only one to blame.

  4. It’s probably been the case for some things (like bread) but those expenses are such a tiny slice of the households’ spending compared to car, transport, housing that it hardly matters…

    But you buy bread every day while your rent is fixed by contract and a car is supposed to last for years. The basket is an average. It is possible that lower income groups have shopping habits causing them to be hit disproportionally.

  5. I have long believed that the psychological impact of the Euro was not sufficiently understood during the planning stage, or they would have settled on a smaller unit – like the old DM or even less.

    The change from the relatively small Schilling or Lira to such a big unit was simply too drastic. I know several people who still mentally convert everything to Schillings, even now.

    I suppose they sized the Euro like this because they tried to imitate the Dollar, instead of looking for the best solution that would fit European traditions.

  6. I think there is quite a bit of truth to the “converting to a bigger or smaller unit” idea. I wonder how the perception differed between the countries who divided and the countries who multiplied? (There were 2 I think?)

  7. The general perception of the rise lies in the price of food, which disproportionately impacts low income people because everyone needs to eat so much. Fish prices have soared, and vegetable and fruit prices have at least doubled since the introduction of the euro. Now I won’t say the euro was the sole cause even though there was a noticeable jump at that time. Many other factors are at play, availability, transport, wages, general inflation, etc. I still convert euros to guilders, after all these years, as many, many others do, expecially old(er) people. Of course a lot of the ‘stuff’ has stayed the same in price or even gone down. But food is a daily item and it seems to keep going up. Let’s see a separate study devoted solely to the price of food over the past five years.

  8. “But food is a daily item and it seems to keep going up. ”

    Not true. See for instance (in German):

    The resarches tracked the price of several hundered of the most popular food items. Only 20% had price increases above the general inflation rate. Less than 2% had price inreases of over 20%.
    About half of the items surveyed are actually cheaper today than in 2000.

    The prices were monitored in large supermarkets.
    If the researchers had taken into account that discount stores are much more popular today than 6 years ago, they would have found that the “real” food price increase of the “average” household was even less (becaus the “average household” now shops more in cheaper stores).

    By the way:
    Just ask your grandparents what they used to pay for chocolate or coffee in the 1950ies. You’ll be amazed how much cheaper (in absolute terms!) these items are today than 50 years ago.

  9. Florian, you live in a different world than I do. I pay, I see, I deduct, I adapt. I am one factual piece of evidence. If you think I’m supposed to believe what the stastitians say, I very graciously decline. If you think I’m delusional, you might be right. But don’t give me all this fancy cant about this and that. Pay, baby pay!

  10. “irrational perception of risk (the difference between accepting €10 now, or a 90% chance of €90 later)”

    Uh, the first is worth 10 q/u/i/d/ euros, while the later has a Fair Value of 81 euros (ten people between them will have 810 euros).

    I don’t believe that’s an example of the “irrationality” you’re trying to present, is it?

  11. Erm, yes, it is. Experimental economists have frequently shown that a lot of people would take the €10. The example is, admittedly, exaggerated.

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