Currency view point Taking a punt //,, The best option sounds most radical: a new currency and new central bank. It is actually a very common step: 28 new central banks have been set up in the past 25 years. They sprang up rapidly in the 1990s as former Soviet and Yugoslav states gained independence. Iraq established a new bank and currency in 2003. Most recently Crimea has been attempting to set one up. These innovators give blueprints Scotland could follow. When Estonia gained independence in August 1991, the government decided to create a new currency to replace the rouble. Less than a year later, in June 1992, deposits held in Estonian banks were redenominated, from roubles to kroons. Special counters at the new central bank were opened to allow residents to swap the old currency for the new one. As a show of confidence in the kroon, residents were also permitted to switch roubles for German marks, a strong currency. The scheme, reviewed in a 2002 IMF paper, worked well: the switch to a new central bank and currency took a week. An independent Scotland should be able to follow this example. It will have more time to plan: fully 18 months between the vote and independence, which would come in May 2016. Scottish notes already circulate, and production could easily be scaled up. The new country’s share of Britain’s foreign-exchange reserves—around £9 billion—would provide credibility. Deciding how the new currency should be managed would be more complicated. Poland and the Czech Republic quickly adopted inflation targets, allowing their exchange rates to float. But in order to smooth trade in the new country’s early years, it would be better to fix the exchange rate against the pound, according to Angus Armstrong and Monique Ebell of NIESR, a think-tank. This would require the SNP to rein in its spending plans. If it did not, Scotland’s expanding deficit might prompt a run on the new currency. But at least such austerity would be in support of a gleaming new currency, rather than to keep in step with grubby old English money.
Posted on: Sat, 13 Sep 2014 17:00:34 +0000
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