The Illusion of Money: Croatia Ranks First in the EU for Consumption Growth After Switching to the Euro

New year, new rules – the kuna has been removed from product prices, and there is no more dual pricing. However, even if there were, it would not help. Because consumption data shows that we are spending recklessly – we are currently in first place in the EU for real consumption growth (adjusted for inflation) in retail during 2023.

 

After the first 11 months of 2023, real retail turnover is up 7.2 percent compared to the level recorded in December 2022, which is the highest growth in the EU. Interpreting this data, Tomislav Globan from the Faculty of Economics in Zagreb claims that the reason should also be sought in wage growth (in October, they were 8.3 percent higher than in October 2022). However, he warns that there is almost certainly another phenomenon at play – the transition to the euro has loosened our brakes regarding spending decisions.

 

– The same product at the same price seems cheaper to us simply because the numbers expressing it are smaller. This type of monetary illusion is known in the literature as the ‘currency numerosity effect’ and denotes a situation where we are more likely to decide to purchase something if its price is stated as 20 euros rather than 150 kunas, regardless of the fact that it is actually the same value. Namely, the way we form our perception of how expensive or cheap something is largely depends on the number of digits that appear before our eyes. For 30 years, Croatian citizens have defined their perception of prices in thresholds, for example, whether something is more expensive or cheaper than 10 kunas, more expensive or cheaper than 100 kunas, more expensive or cheaper than 1000 kunas… One more or one less digit has been scientifically proven to influence individual purchasing decisions.

 

Because of this, merchants avoid displaying a price of 100 kunas and prefer to state 99 instead. With the introduction of the euro, these thresholds have been completely disrupted, and we will need time to adjust to them. This especially applies to amounts less than 100 euros, as it may happen that we instinctively categorize single-digit and double-digit prices as acceptable, while the kuna equivalent of that price may seem too expensive simply because it is expressed in three digits.

 

For example, the price of a concert ticket may seem more acceptable if it states 69 euros rather than the equivalent of 520 kunas. Even if we had maintained dual pricing for another year, we would have faced a similar problem this past year – explains Globan, adding that it is difficult to assess how much this monetary illusion impacts overall consumption growth in Croatia, but he is convinced that the significant growth in real wages in 2023 and the consumer optimism prevailing in Croatia have been the main drivers of real consumption growth, which has been the highest in the European Union during 2023.

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– However, anecdotally, everyone I have spoken to has confirmed that they can recognize themselves in this story, meaning that our spending brakes have loosened due to this psychological effect – concludes Globan.

Since this is a psychological phenomenon that we have all surely experienced (because, of course, it is easier to pay 80 euros than 600 kunas, and we persistently repeat this ‘number substitution’ from the beginning, regardless of the fact that our teeth grind when the cards arrive for payment), we asked Nikola Erceg, a psychology professor at the Faculty of Philosophy in Zagreb, about the significance and consequences of the illusion of money. He states that two parallel effects are likely at play in the adjustment to the euro.

 

– The first is the illusion of money or euro illusion that you are talking about. This refers to the phenomenon that we are more sensitive to the nominal value of money (the figure we see) than to its real value (what that money is worth, or what we can actually buy with it). Because of this, prices expressed in euros seem low to us; for example, we will perceive a price of 3.45 euros for a pastry in a café as cheaper than 26 kunas, thus the illusion of money can encourage unwanted spending. On the other hand, this is likely countered by a caution effect: the euro is (still) uncharted territory for us, we know that we often make mistakes in assessing value, so we are therefore more cautious. For example, in our monitoring of citizens’ adjustment to the euro, about half of the citizens still respond that they find it harder to decide to make a purchase after the introduction of the euro than before. One reason is certainly caution, but an additional reason is certainly inflation and high prices – says Erceg, adding that the illusion of money has its second effect as well.

 

In addition to potentially prompting us to spend recklessly, it also causes us to feel poorer with salaries expressed in euros than with the same salaries when expressed in kunas.

 

This, he says, is a finding that is also consistently obtained in research on citizens’ adjustment. Interestingly, this effect is just as strong one year after the introduction of the euro as it was at the beginning. However, this is not so surprising, as about half of the citizens in Croatia still receive a three-digit salary in euros, which likely further amplifies the impression of a lower standard in euros.

 

However, we were curious whether this illusion might also help increase savings. – An interesting question. I must admit that I have not seen research on this topic. However, thinking about it, the illusion of money could even be good for savings, if we are in a position to save anything at all. For example, it could create the impression that we are not saving enough, even when we might be. On the other hand, the illusion of money in some situations of haste, fatigue, or simply thoughtlessness leads to unwanted spending, which does not favor savings – he assesses.

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Still, a year has passed; how much longer can this illusion deceive us? – We have had several factors that have not worked in our favor during the transition to the euro. The first is that we switched to the euro during a time of relatively high inflation, which has certainly made our adjustment more difficult. The second factor is that the mathematical operation of converting euros to kunas is not very simple; we have to multiply by 7.5, which is not easy, so we are prone to errors. Given this, our adjustment is progressing relatively slowly. For example, at the beginning of last year, about 60 percent of citizens claimed that they constantly converted to kunas. According to the latest data we have, that percentage dropped to just below 50 percent by the end of the year.

 

This means that, on average, we have a continuous decline in the number of people who claim to constantly convert to kunas of about one percent per month. This shows that our adjustment to the euro is progressing, but relatively slowly. In line with this is the ‘finding’ that shows that citizens still perceive salaries in kunas as better than the same salaries in euros. How long this will last is difficult to predict. If such adjustment trends continue, it will last a long time, perhaps even several years. However, there is a possibility that the abolition of dual pricing may slightly accelerate this adjustment, so that by the end of next year, the euro may indeed become a ‘more natural’ currency for most citizens – concludes Erceg.

 

Until then, a piece of advice – convert to kunas; it will seem more expensive, which may save you from thoughtless consumer decisions and harder-to-pay cards.