Every cent helps: Eurozone explores scrapping smallest coins

BRUSSELS (REUTERS) - Saving pocket change may not end the euro zone crisis, but the European Commission hopes that scrapping the smallest coins could help penny-pinching governments cut costs.

The European Commission outlined proposals this week for the 17 euro zone countries to scrap their 1 and 2 cent coins, leaving 5-cent pieces as the smallest in circulation.

The Commission says the cost of making the coins has exceeded their face value for the past 11 years, effectively costing member states 1.4 billion euros (S$2.3 billion).

More than 45 billion of the 1 and 2 cent coins have been minted since the euro entered circulation in 2002, but many are now buried behind sofas, lost in back pockets or left on the street rather than making their way to cash registers.

While scrapping them all together may appear to make sense, some consumers worry that rounding prices up to the nearest 5 cents will prove inflationary. On the other hand, rounding prices down to the nearest 5 cents might be beneficial.

Evidence from euro zone countries that no longer issue the smallest coins - including Finland and the Netherlands - shows that there is little impact on prices either way.

"People like to be concerned," said Carsten Brzeski, a senior economist at ING in Brussels. "But if you think about the psychology of price, I think you'll rather see a rounding down to 95 cents than an upward adjustment."

While the Commission, the EU's executive, could decide to scrap the 1 and 2 cent coins, depending on what comes out of consultations with member states and discussion with the European Parliament, there are also other options, including changing the content to a cheaper metal.

In countries where consumers are fond of small coins and precise pricing, including Germany and France, the proposal to withdraw the 1 and 2 cent pieces has gained little traction, a Commission official said. But there has been substantial concern among consumers about the possibility of a spike in inflation.

If the euro zone countries were to decide to withdraw 1 and 2 cent coins from circulation, it would not be the first time a nation has scrapped its smallest denominations.

Non-euro Sweden has abolished small coins four times in the past 40 years and seen no direct effect on price levels.

Canada's inflation rate has averaged 1.1 per cent since the Royal Canadian Mint stopped distributing pennies in Feb 2013.

"The ball is now in the court of the member states to see if they can come to an agreement," said Vandna Kalia, a spokesman for the Commission's economic affairs department.

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