New Year... New Money

The turning of the year, and indeed the decade, was more than usually symbolic here in Tallinn. 2011 marks Tallinn's turn, together with the Finnish city of Turku, as the European Capital of Culture. Given the relatively small size of the city- just 450,000- even in normal times Tallinn is a very culturally rich place to be: several international film festivals, a large amount of theatre, a wide variety of music, street performance, open air concerts and so on. This, coupled with a number of high quality museums ensures that there is always something to see and do. Tallinn may be relatively small, but it is a capital city- and it feels like it too. The events of 2011 so far seem quite low key, but I am certainly looking forward to the opening of the refurbished maritime museum in the former seaplane port- with the vast concrete hanger providing new indoor exhibition space.

Yet it is not just the promise of a culturally rich year that makes 2011 a special year for Estonia.

The final adoption of the Euro is equally important- if more controversial. The Estonian Crown when adopted in 1992 was a symbol of the freedom of newly recovered independence- and went on to become a symbol of Estonian financial rectitude and responsibility. When the Crown was adopted, many people went out to buy new wallets in order to keep the new money clean- there was cheering and a huge sense of emotion as the currency came into being.

The adoption of the Euro has been a far more wistful occasion. In a sense the adoption of the single European currency marks out Estonia as a major success amongst the countries of transition- and the terms of the 2004 treaty of accession did not give Estonia the the option as to whether or not to join- once the terms of the treaty were satisfied, joining was mandatory. Indeed government policy ever since has been to fully comply with the conditions that would allow the country to enter the Euro zone. This has involved substantial sacrifices- Estonia has maintained a level of fiscal discipline that would shock the Germans, never mind the British or the Greeks. Now the goal has been achieved- and indeed many inside the Euro take it as something of a vote of confidence that Estonia was prepared to join, when conditions inside the Euro zone were so inauspicious.

Of course the English language media has been spectacularly ignorant about what Estonia was actually doing. The Daily Mail (and even the New York Times) blithely informed their readers that Estonia was joining the European Union- an event that happened six years ago! The Mail, less surprisingly, could not understand why anyone would join a currency that was unlikely to survive. As always, they failed to point out that the Pound has managed to fall thirty percent over the past two and a half years against this supposedly worthless currency- and despite considerable turbulence in the markets in the past six months has even continued to fall.

Of course I do think that the Euro needs reform- and I would even welcome the exit of some of the weaker members from the Euro- but the way that British right wingers portray the single currency is almost wholly wrong. The markets are not that interested in sovereignty, they are mostly interested in efficiency, and as I have noted here repeatedly, the problems of the Euro are all about unsustainable debt- and the levels we are seeing in Greece or Ireland are unsustainable no matter how much you devalue your currency. Irresponsible or incompetent or corrupt policies will lead to breakdown, no matter what. Indeed the presence of the Euro has arguably given a cushion of stability- the crisis would have happened a lot sooner if the Drachma or the Punt had remained as free floating currencies.

Neither is the idea that interest rates were too lax for the periphery in the good times, and are now tightening too soon in the bad, a particularly credible one. Good financial policy does not wholly rest on the price of money- and the structural problems of the PIIGS states show not the imbalances of the last decade or so, but the financial mismanagement of an entire generation. The failures of the UK, in pensions management, capital allocation, and investment are no better than those of Spain, Portugal, or Ireland, despite the fact that the UK has enjoyed the dubious benefit of a floating currency. The Blair-Brown years were the years when Britain ate up its seed corn, and now the country must pay the price for years of bloated and incompetent government, excessive and inefficient welfare rolls and staggering failures of leadership.

Over the same period, the Estonian government ran surpluses and created reserves. The nominal government debt is just 9.2%, yet the reserves are now around 11%. Although private debt did grow strongly, it was from such a low base that even now, it is less than half the percentage debt levels of neighbouring Finland- which compared to the UK, is hardly prodigal. Estonia is able to join the Euro as a strong member- a country that affirms German levels -or better- of fiscal responsibility.

So as Estonia enters the new year, it adopts a new currency. In fact, given the horrors of Estonian history over the past century, it is the ninth time that Estonia has been forced to change its money: 1910: Tsarist Roubles, 1916: Occupation Marks, 1918: Estonian Marks, 1928: Estonian Kroon, 1940: Soviet Rouble, 1941: Occupation Marks, 1944: Soviet Roubles, 1992: Estonian Kroon. The difference is that this time the symbolism is one of peaceful prosperity and not of occupation.

As I go out to spend Euro for the first time in Estonia, I reflect that the country is making decisions to promote its own prosperity and maintain its identity, and that is more or less the opposite of what the ignoramus Daily Mail journalist- who did not even know Estonia was in the EU- thinks that the Euro actually does.

The Euro needs reform- that is a given. However the accession of Estonia underlines that these reforms can indeed be undertaken. Though the global debt crisis is entering a new phase, and the Euro will not be unscathed, it is by no means clear to me that the UK is in any better state: the crisis is a structural crisis, not a currency crisis. We need to make fundamental, radical changes- and the currency is in far less critical state than the underlying, real economy.