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European Commission

MEMO

Brussels, 14 May 2013

Issues related to the continued issuance of the 1 and 2 euro cent coins

Why focus on the 1 and 2 euro cent coins today?

Since 1 January 2002, the euro has been available in physical form as banknotes and coins, including the 1 and 2 euro cent coins. The recent focus on the 1 and 2 euro cent coins originates from a request from the European Parliament and the Council of Ministers. In the 2012 Regulation on the issuance of euro coins1, the co-legislators tasked the Commission with assessing the use of the 1 and 2 euro cent coins against the criteria of costs and public acceptability. In response to this request, the Commission conducted an analysis based on the consultation of the main stakeholders (including public authorities, central banks, banks, consumer associations etc). The Communication adopted today presents the results of the Commission's assessment.2

The debate surrounding the 1 and 2 euro cent coin is, however, not new. The main elements of this debate are the high production and handling costs of the 1 and 2 euro cent coins compared to their face value, the high loss rate of these coins (i.e. these coins simply 'disappear' from circulation), and the decrease in purchasing power of these two small denominations. The debate also centres on the issue of inflation or perceived inflation. The general public seems to fear that a suppression of these coins could lead to a rise in consumer prices. Overall, the general public seems to be rather attached to the two coins as shown by the results of the Commission's Eurobarometer survey (see. http://ec.europa.eu/public_opinion/flash/fl_362_en.pdf).

Who did the Commission consult to prepare its communication?

The Commission consulted the main stakeholders of the cash cycle in the euro area, by means of detailed questionnaires, both from the public and private sectors: Member States' Treasuries, National Central Banks, national Mints, banks and cash-in-transit companies. Representatives of the end-users of euro cash were also consulted, via European business and consumers associations.

What are the possible scenarios for the future of the 1 and 2 euro cent coins?

In the Communication, the Commission identifies four possible scenarios for the 1 and 2 euro cent coins. Evidently, the status quo (i.e. continued issuance under the same conditions) and the withdrawal of these coins are the two main scenarios analysed. Two variations of these main scenarios are also explored, namely the continued issuance at reduced cost and the gradual disappearance of the coins.

The first scenario to continue to issue the 1 and 2 cent coins under today's conditions, without changing the legal or material context ("status quo scenario"). The coins remain legal tender and continue to be produced in line with the current technical specifications (such as metal, weight and size) and without changing the production and issuance processes. A variant of this scenario is to continue to issue at reduced cost, aimed at reducing coin issuance costs through changing the material composition of the coin or by increasing the efficiency of coin production, or both ("issuance at reduced costs scenario"). Most euro area Member States are, indeed, confronted with issuance costs exceeding by far the face value of the 1 and 2 cent coins, thereby leading to a negative seigniorage income3.

The third scenario would aim at abolishing the 1 and 2 cent coins within a short timeframe ("quick withdrawal scenario"). Under this scenario, the issuance of these coins would cease while the coins in circulation would be withdrawn mainly through retailers, supermarkets and banks within a pre-established short time period. Legally binding rounding rules would apply as of the first day of the withdrawal period and the coins would cease to be legal tender at the end of the withdrawal exercise.

Last, a "fading out scenario" would have the effect of a withdrawal, but achieve it in a different way. While the issuance of coins would cease and binding rounding rules apply also under this scenario, the coins would however remain legal tender. The 1 and 2 cent coins could still be used, but only for payment to the rounded final sum. Since no new coins would be issued, the coins would be expected to disappear gradually from circulation due to the high loss rate and the lack of attractiveness of these coins as convenient means of payment.

What are the advantages and disadvantages of these scenarios?

A major advantage of both the status quo and the scenario for issuing at reduced costs is that the existing cash payment habits of citizens would not be disrupted. This is not true for the quick withdrawal and fading out scenarios, which would both call for the introduction of rounding rules and would therefore imply that citizens change their payment habits.

While being attractive from a citizen's perspective insofar as no new habits would have to be established, the status quo is quite unattractive from a cost perspective. It actually perpetuates the situation of negative seigniorage in many euro area Member States. The issuance at reduced costs scenario, by contrast, would allow a reduction in issuance costs by changing the raw material of the coins and/or enhancing the efficiency of the coin production. Important cost savings could also be achieved through the quick withdrawal or fading out scenario. The discontinuation of the 1 and 2 euro cent coin would put an end to the negative seigniorage of Member States and reduce the overall coin handling costs.

The costs of an information campaign in the Member States must also to be taken into account when weighing the various scenarios.

Under the fading out scenario, the high loss rate of the 1 and 2 euro cent coins would promote a fast disappearance (3 to 4 years) of these denominations from circulation. This scenario would avoid the costs that would be related to the active withdrawal of coins in a very short period of time as under the quick withdrawal scenario. However, supermarkets, retailers and banks would have to bear the costs for the handling of these coins until they have disappeared from circulation. Under this scenario, citizens would need to adapt to the new rounding rules.

What are the main conclusions of the Commission's assessment?

Each of the different scenarios has its pros and cons. The results of the stakeholder consultation and the stocking-taking exercise conducted by the Commission allow us to draw a number of key conclusions. The production of 1 and 2 euro cent coins is clearly a significantly loss-making activity for the euro area Member States. Each of the four scenarios for addressing these problems could therefore apply to the 1 and 2 euro cent coins even-handedly.

The attitude of the general public to 1 and 2 euro cent coins is rather paradoxical. While they seem to be attached to these small denominations and fear the risk of inflation if they were to disappear, they do not re-circulate the coins. The resulting high loss rate combined with the existence of psychological prices (e.g. 12.99) lead to an ever-growing demand for issuance of new small coins.

The economics of issuing 1 and 2 euro cent coins would plead for discontinuing issuance. However, the cost elements need to be balanced against other considerations. In particular, the potential negative reaction from citizens regarding the use of rounding rules and the concomitant perceived inflation should be taken into account. In taking a decision on the 1 and 2 euro cent coins, the current challenging economic outlook also needs to be taken into account.

The Commission does not have a preference for any one of the four scenarios at this point in time. Further discussions with all relevant stakeholders are needed on the basis of the four possible scenarios.

A short history of the 1 and 2 euro cent coins

The introduction of the euro in 1999 was a major step in European integration. Since 1 January 2002, the euro has been available in physical form, as banknotes and coins with now around 330 million EU citizens in 17 of the EU Member States using the euro as their currency. Also, the 1 and 2 euro cent coins were introduced at that time. The denomination structure of the euro banknotes as well as of the euro coins (1, 2, 5, 10, 20, 50 cents, 1 euro and 2 euro) has remained unchanged since the introduction of the euro. Euro coins are issued by Member States, but the Council of Ministersis responsible for harmonizing their denominations and technical specifications. Denominations and technical specifications of euro coins intended for circulation are set out in Council Regulation (EC) No 975/98.

1 :

Regulation (EU) No 651/2012 on the issuance of euro coins (OJ L 201, 27.7.2012, p. 135).

2 :

A detailed staff working paper is also annexed to the Communication.

3 :

Seignoriage of coins is the difference between the face value of the coin and the costs to produce and issue it. The positive difference between the two parameters (i.e. positive seignoriage) is a lucrative source of state income while a negative difference (i.e. negative seignoriage) will lead to losses.


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