Eesti Elu
Instead of Joining the Eurozone, Estonia Ought to keep the kroon and go off the Currency Board Arrangement (50)
Arvamus 22 Jun 2010 Jüri EstamEesti Elu
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Estonia is on the brink of discarding her own currency - the kroon - and replacing it with the euro of the so-called “eurozone” of the European Union. There are several reasons why Estonia should resist the temptation to adopt the euro and stick with the crown instead.

The most compelling argument is not so much an economic, but a political one. G.J.K. Koell grabbed the bull by the horns in his 1952 article “Orjastatud raha”- “Enslaved Money” in Tulimuld - an Estonian magazine of literature and culture. The right to issue money and control monetary policy is a “means of power”, as Koell notes. Political power - who has it, as well as who doesn’t - is at the crux of the matter. Monetary policy is one of the most powerful devices in the toolboxes of nations. It is ill-considered to relinquish control over this vital locus of power, and of national sovereignty. Instead of having others decide for you and simply being along for the ride, it is vital that we retain the capacity to substantially influence and shape the development of our domestic economic environment.

Without getting into the various ways in which the workings of a Ministry of Finance (or Treasury) and a Central Bank can be made to interoperate in one nation or another, the important thing is that a country not abdicate, meaning she should not relinquish monetary decision-making and the right to issue currency to an external power. A prudent country will simply not go along with being “de-choiced". Control over the amount of money issued by a country and other forms of fiscal and monetary discipline are indispensable levers that must remain in the hands of elected officials and the experts who advise and help them.
If maximum employment, stable prices, and moderate long-term interest rates are at all important to the Estonian people, they should not let go of the helm and the throttle and the other decision-making mechanisms to be found on the bridges of ships of state.

Of the Shortcomings of the Current Pegged Estonian system

Critics argue that since Estonia has a currency board arrangement (CBA), we have precious few economic and monetary levers at our disposal anyway. Which is true. Under the CBA, the crowns in circulation are backed with foreign reserves at a fixed exchange rate to the euro, making crowns “euro clones” for all intents and purposes. Estonian currency is therefore not actually sovereign, and our options in respect to making monetary policy adjustments are very limited.

The CBA was introduced in Estonia in 1992. It was predicated on the assumption, among other things, that a brand new country just emerging from 50 years under Soviet rule didn’t have the administrative capacity and the skill sets needed to supervise and regulate banking institutions, to ensure the soundness and stability of the nation’s financial system, and to contain the systemic risks that can undermine markets. Not only were the authors of the CBA concerned about the viability of the nation’s payments system, but there was also doubt about the ability and the will of the Estonians to keep inflation at bay. Thus the crown was pegged to the Deutschmark, with the peg shifting to the euro when the Deutschmark was dropped by the Germans in favor of the European currency.

To have a currency board is to have your wings clipped. Adopting the euro means even more of the same

To a substantial degree, the CBA was sold to Estonia as an anti-inflation mechanism, which in reality has not functioned all that reliably, thus giving us cause to reconsider using it at all. Some experts have leveled a whole variety of arguments against the concept of the currency board. See for example “Currency Boards are Not the Answer” -

Implementation of the CBA mechanism came at the cost of having one’s leeway for decision-making dramatically restricted. Estonia’s transition period government went along with the limits imposed on her, much as children cared for by a governess are not free in many of their decisions. A government using a CBA has to reconcile itself to the fact that it is extremely dependent on the economic decisions of the country that its currency is tied to. To begin with, a CBA essentially precludes the use of monetary policy to stabilize the economy - something that Estonia’s unemployed persons (one in five) must now be rueing. In addition, the exchange rate cannot be used by Estonian officials as a tool. Should the country be faced by an illiquidity crisis, the currency board is unable to act as a lender of last resort. These are but some of the policy options Estonians have done without for nearly twenty years, in comparison to a broad variety of monetary tools that leaders of countries with sovereign treasuries and banking systems have at their disposal. This is the point: means of monetary control are not only the steering wheel and the gas pedal and brakes of the economy of a country, but they are also important means of political power. Never having enjoyed them in recent years, Estonian politicians and common people in the street do not fully realize what they have been missing. This may help to explain why the majority of the media and many others seem to be ready to ditch the crown. With the exception of the oldest of living Estonians, we have never seen the arsenal of monetary measures being put to effective use in our country.

One should think twice before divesting one’s self of the means by which one can “steer one’s vehicle”.

Should Estonia switch to the euro in the near future, she will jump from the CBA frying pan into the EU fire, putting her trust solely and rather blindly into the decisions, competence and goodwill of the European Central Bank and the distant politicians who control it.

Estonia has Demonstrated she can run her own Monetary Show

During recent months, Estonia has been repeatedly lauded by various expert observers for her ability to rein in debt and to impose uncomfortable austerity measures. While Estonia has been doing this to prove she is fit for inclusion in the eurozone, it goes to demonstrate that she latently has the political moxie to keep her monetary discipline no less tight than that of the Germans and Swiss.

Instead of ditching the crown and relinquishing ever more control to the Allan Greenspans of the European Community, Estonia should go the opposite direction, having a Fed of her own. Not only should she avoid the euro, but she should also capitalize on what she has amply demonstrated, that being the political will required to maintain domestic fiscal discipline. By this, Estonia has set herself apart from those regions of Europe that have been demonstrably weak of will or even corrupt in the in the broadest sense. Estonians have probably had it harder than the Greeks, but haven’t succumbed to the temptation to riot because of the “unjustness” of it all.

Estonia should terminate the currency board arrangement and take control of not only her budgetary, but also of her monetary destiny. A country that rides rein on debt is also capable of keeping her currency from being debased.

Regardless of whether the Southern European countries and Hungary succeed or fail in drawing the necessary conclusions from their largely self-induced problems, with the eurozone probably destined to remain on tenterhooks for quite some time, Estonia should avoid the euro, scrap the CBA, and vest her own currency fully. This would require vowing to continue to faithfully monitor and discipline herself, as she has successfully done in recent years.

The only things that seem to be missing for Estonia to implement sovereign monetary policy once and for all is someone to champion the idea, and to encourage the Estonians to trust in themselves.
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