AN ISSUE TO BE TACKLED NOW!

This is a guest post from a business friend of mine who is currently living in Estonia but who has considerable experience in running businesses in the Baltic’s and other Eastern European nations. He has experienced the creation of new currencies and he relates those experiences in this article. Phil Lawrence, originally from Buckie is a longstanding supporter of Scottish Independence.

Not too wee, not too poor and definitely not too stupid!

It’s done. Not exactly the result that I was hoping for but, somehow, we are facing in roughly the right direction. At least IndyRef2 seems to be front and centre for the SNP and the key people in the party are actually talking about it in a seemingly positive way.

I have been observing the media from both sides of the border in recent days and the two critical issues which are being focussed on by the naysayers are borders and currency. 

The border issue is one for another day but I would like to take a bit of a dive into currency issues in an attempt to reassure my fellow too wee, too poor, too stupid countrymen that this is an area of the economy which holds no terrors. 

My own story is one demonstrating a strong association with the Baltic states since the early 1990s. I moved to Tallinn, Estonia in March 1993 and I met Iain Lawson over here not too long afterwards. We have witnessed remarkable things inthe intervening years and it became manifestly clear to me that one of the critical spokes by which any state can develop, grow and protect its economy is by sensible currency choices.

So, what were the currency stories in the Baltic states? Please bear with me as I go through the dry procedural stuff! 

As a critical first point we must remember that the three Baltic states were component republics of the Soviet Union and,although they had all been preparing for an independence showdown for several years, the monolithic state controlled from Moscow collapsed virtually overnight in August 1991. Suddenly Estonia, Latvia and Lithuania were independent states but reliant on a limited domestic supply of the non-convertible Soviet rouble – a far from ideal situation.

The early weeks and months were fraught as the fledgling democracies had almost nothing to trade with – the simplest things such as flour from which to bake bread were in critical short supply – but there had been some strict and detailed planning introduced in the years leading up to this point so they were not flying blind.

Let’s look at Estonia first of all. As early as 1987, prominent democracy-minded Estonians had devised a Self-Managing Estonia project for Soviet Estonia and this was accepted into law in 1989. The following year, on 1^st January 1990, Eesti Pank (the Bank of Estonia) was re-established. The creationof a post-rouble economy was well underway. There was even a public competition announced in December 1989 for the design of new banknotes. But there was still the question of how a new currency would be underpinned.

When it became clear at the beginning of WW2 hostilities that the Soviet Union was going to roll over Estonia, the national government made sure that the country’s gold reserves were sent west out of Moscow’s reach. These reserves were split between London, Basel and Stockholm. In December 1991 the newly re-independent Estonia began negotiations for repatriation of these gold reserves and the UK rapidly agreed to return the amount held in London, in January 1992. Negotiations in Switzerland and Sweden were taking longer but currency reform was required as a matter of urgency so the powers-that-be proposed that the new currency be supplementarily underpinned by the resources of the land. More precisely there would be a “national forest fund” set up from so-called “reserve cutting areas.”

The Estonian kroon was to be introduced on 20^th June 1992 and a great deal had to be done before that date. IMF membership was established and re-entry to the Bank for International Settlements was achieved. Sweden also resolved to return its Estonian gold by 1^st July.

The currency could be underpinned without the sacrifice of any forest reserves and so the Estonian kroon (EEK) was rolled out on schedule. A proportion of personal rouble savings were converted to EEK at a rate of 10:1 whilst the new currency was pegged to the Deutschmark at a rate of 8 EEK to the DM. In one stroke Soviet roubles were withdrawn from the economy and replaced by an internationally convertible currency.

This DM peg was the basis of the need for the underpinning mechanism by which Eesti Pank and its Currency Board had to place enough foreign currency on deposit to cover the exposure of the entire money supply available. In the case of Estonia in 1992 that equalled a money supply of only approximately DM 375 million, or somewhere around £130 million at exchange rates of the time. To put that into perspective there was the currency equivalent of less than £90 per citizen of the country available in total money supply!Under these circumstances the Currency Board had to develop the currency, enhance money supply, advance the economy and, at the same time, do so in a manner which caused as few ripples as possible to the markets upon which Estonia had to rely upon for its progress as a raw democracy.

I’m not going to go into any more blow-by-blow history lesson here as the simple point that I would wish to amplify is that if there was ever a case of too wee and too poor…

As the years passed Eesti Pank adjusted the peg from the DM to the Euro when Germany joined that currency and then finally changed to the Euro itself in 2011. At each stage there was rumour of a devaluation of the EEK but that never happened as the state bankers held their nerve all the way, even during and after the 2007-2009 economic crisis.Definitely not too stupid…

Latvia and Lithuania went in slightly different directions from Estonia but arrived at the same place eventually with ultimate Euro adoption.

Latvia had a liquidity squeeze in early 1992 with outgoing payments almost dwarfing incoming payments and absolutely no access to additional money supply or credit. A temporary solution was sought and the Latvian rublis was launched in May at very short notice as a transition currency at parity with the Soviet rouble. This was a risk as it could have been seen as printing currency with no underpinning value but it held until the Bank of Latvia could introduce the pegged Latvian lats (LVL) in 1993. The LVL was a curious currency compared to its neighbours in that it was pegged to what is known as a “basket of currencies”. This means that there is more internal flexibility within the peg as exchange rate fluctuations among a group of currencies tend more towards convergence than divergence – what you may lose on the pound you can make up for on the dollar etc. In 2004 the LVL was switched to a hard peg against the euro and a final transition to the euro as the national currency in 2014.

Lithuania suffered a similar liquidity squeeze to Latvia but even earlier. In early August 1990, even before the fall of the Soviet Union, the Bank of Lithuania introduced the talonas as a currency for non-food goods operating alongside the Soviet rouble. It was highly unpopular as it did not do much other than curb demand in the economy in general as it was implemented much like a ration coupon. Talonas notes were very small in comparison to conventional banknotes and featured local animals such as elk, bear and bison in the artwork – they were disparagingly referred to locally as “zoo tickets”!

The Lithuanian litas (LTL) was introduced in 1993 as a currency pegged to the US dollar and that peg was replaced by a relationship with the euro in 2002. The LTL was succeeded by the euro in 2015 as Lithuania joined the dots on Baltic membership of the EU currency.

So that’s the potted history of Baltic currencies. But how does that relate to the Scottish independence debate? 

From my perspective the currency question is quite surmountable if smart heads can prevail and an information campaign can explain how all of Eastern Europe survived without slipping into a sea of unmanageable debt and deficit when using EEK, LVL, LTL or whatever so-called minor currency. This is not a binary argument – sterling or euro – but the MSM are only too happy to see everything pop down that rabbit-hole because that is a convenient untruth to tie up many, many column inches which will influence a sizeable chunk of our population that the argument is, in fact, binary. 

A currency is defined by the economy that underpins it and the governance of that economy as a measure of stability. If we peg to sterling then we are underpinned by choices in London, that is clear. But we could, for instance, peg to any basket of currencies that we choose so that structural weaknesses in one basket currency leading to loss of value tend to be reflected in an upward swing in one or some of the other currencies included in the peg, leading to ultimate stability. Critics might argue that there could be a scenario where all the basket currencies are affected downwards, but that point of view simply demonstrates a lack of understanding or lack of willingness to engage as such a Black Swan Event on currency markets would be ripping the floor out from under Sterling simultaneously with other currencies. So, a strategic information campaign needs to start now. Absolutely right now.

It is my firm opinion that there needs to be a project put in place rapidly to develop the underpinning of a putative Scottish currency. There is absolutely no point in waiting until a referendum is called and then being caught cold. More to the point, we need as much useful information on currency available before any referendum White Paper is published. There needs to be the immediate formation of a Future Currency Commission (FCC) which can perform an audit of Scotland’s potential monetary and fiscal levers but completely unrelated to GERS. The FCC can calculate genuine balance of payment figures – it’s not impossible to do this as all the numbers are hiding there in plain sight but it just requires some effort to compile and compute. All those Scottish goods shipped out of English ports which are totted up as English exports and thereby added to the presumed English balance of payments. The FCC can model the Scottish economy on the basis of genuine numbers offering genuine valuations. Only then can we accurately estimate the true cash and credit requirements of our central bank activities – monetary policy. Only then can we accurately estimate the true potential for taxation and government spending – fiscal policy. Accuracy is the ultimate enemy of Unionism in terms of the economy. The FCC can be our greatest weapon.

I would make one final point. A change in currency is nothing more than a minor inconvenience as long as the preparation is undertaken diligently. It need be no more traumatic than getting a new car for the average citizen – maybe you are not used to every aspect for a wee while but you do actually get there – nevertheless a full understanding of the macroeconomic controls from the point of view of fiscal and monetary levers is crucial, hence the FCC. That takes planning I have seen many changes in currencies in the Baltics and I’m not quaking in fear! No, let’s really value our economy and move up a gear.

There are other aspects that we may wish to consider such as the prospective composition of a proposed currency basket, banking in post-UK Scotland, credit terms in a time of currency change, the potential for alternative currency solutions etc. and these are all subjects which can be visited in further articles.

There are other aspects that we may wish to consider such as the prospective composition of a proposed currency basket, banking in post-UK Scotland, credit terms in a time of currency change, the potential for alternative currency solutions etc. and these are all subjects which can be visited in further articles.

As a wee aside, how can the SNP turn round and claim to have all the answers regarding the mathematics of independence when they deliberately enable Unionist parties by convincing YES voters to waste almost one million votes?

MY COMMENT

My thanks to Phil. I have learned a great deal from my work experiences abroad over the years and feel everyone learning about other countries experiences when dealing with issues that will be important to an emerging Independent Scotland is very beneficial. Especially when dealing with the fears our opponents will certainly stoke up. I know nobody who found the currency creation that took place in the Baltic countries anything to worry about. Our opponents like to create fear and trepidation, articles like this provide the confidence and knowledge to make those efforts unproductive.

I am, as always

Yours for Scotland

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