Currency is a topic often debated when considering Scottish independence. This article does not discuss what currency option would be best but instead considers the experience of other nations creating a new currency. Therefore, we answer the questions many undecided voters have: Would Scotland be able to create its own currency? How difficult would that be? And would this cause economic instability?
In this article, we will present several mini case studies to highlight the positives of adopting a new currency and will provide examples of recently independent countries that have created and launched their own currency both quickly and effectively.:
- Estonia gained independence from the Soviet Union in August 1991.
- By June 1992, Estonia became the first country of the former Soviet Union to replace the Russia Ruble with its own currency, the Estonian Kroon (just 10 months after gaining independence).
- After the decision was made in April 1992 to introduce a Currency Board, preparations for the introduction of the Kroon moved along at full force.
- The introduction of this new currency was efficient and successful. Alongside other monetary policies, the establishment of the Estonian Kroon, led to inflation in Estonia dropping below 3%, unemployment falling below 6% and foreign investment rising.
- Estonia joined the European Union in 2004 and later adopted the Euro in 2011.
- The Croatian National Bank was formed in 1990, before the country was actually independent and the new currency followed just a few years later.
- In 1992, Croatia became involved in the war in Bosnia-Herzegovina and continued to be until 1995. Many industries were damaged by the war. For example, the manufacturing industry was severely affected, with about a third of its capacity being destroyed. Such damage caused for GDP in 1993 to be nearly 40% lower than the 1990 level. Meanwhile, prices were rising, and the annual rate of inflation was more than 1100%.
- Croatia implemented a Stabilisation Programme. This involved actions such as the central bank tightening monetary policy and relaxing the foreign exchange market. In just one year, inflation had steadied. In May 1994, as part of this stabilisation process, a new currency, the Kuna, was introduced to replace the Dinar.
- This stabilisation programme and the introduction of the new Croatian Kuna brought inflation down from the 1993 rates of 1616% to 1.0% in 1994 and 3.7% in 1995.
- Since the introduction of the Croatian Kuna, it has remained stable and has effectively countered inflationary expectations
- Croatia continues to use the Kuna in the present day.
- The Slovakian Central Bank was established in 1993, alongside its new currency, the Slovak Koruna. This was as a result of the collapse of the Czechoslovak Federation.
- The federation dissolved in January 1st, 1993 and by February 8th, 1993, the official monetary separation had taken place and the Slovak Koruna was established (just 1 month and 7 days after the separation of the federation took place).
- The separation of the federal currency and the establishment of the new Slovak Koruna had to be carried out very efficiently.
- Slovakia and its new currency succeeded in ensuring stable and low inflation, a steady, growing economy and converged to the EU economies.
- Slovakia adopted the Euro in 2009, 5 years after joining the EU in 2004.
These mini case studies demonstrate new currencies being created and launched quickly and effectively, even under far more difficult circumstances than would be the case with Scotland leaving the UK amidst Brexit chaos. Establishing a central bank (to manage the new currency) is a task that many other countries have managed successfully and sometimes even before they are fully independent.
Therefore, if we consider the case of Scotland, which has not recently experienced war or faced the levels of inflation that Croatia did, for example, the idea of launching a new currency seems far less daunting even before considering the payback of gaining full control over monetary policy. In fact, as in the case of Estonia, it may actually lead to drastically improved financial circumstances and greater stability.
None of the nations mentioned throughout this article worried about the cost of introducing a new currency, as it was clear that the benefits of full monetary policy control would outweigh the costs. Moreover, when a new currency is introduced, the government has the option to simply create enough of the new currency to cover such costs. Both Estonia and Slovakia now use the Euro, having decided that, as developing nations, being closer to the EU would benefit them. However, that is a decision that both countries chose to make, and as we have previously explained, Scotland would not be forced to use the Euro, even if it decided to rejoin the EU as an independent nation.
Therefore, the issues surrounding the creation of a new Scottish currency should not act as an obstacle for independence. The timing of implementing a new currency would be when it worked best for Scotland and that would be dependent on the prevailing political and economic circumstances and the trade agreement with the rest of the UK post-independence. Indeed, if launching a new currency in Scotland were to unfold similarly to other countries that have also created their own currency, an independent Scotland will be likely to experience stability, and greater financial benefits, allowing for fully monetary policy control and flexibility that we do not enjoy as part of the UK.
Note: The Pound Scots symbol used in the image for this article was designed by Stewart Bremner and Gordon MacIntyre-Kemp and is free to use to anyone writing about setting up a Scottish currency.