Scotland looks to lessons of short-lived Czech-Slovak monetary union

17-09-2014

The short lived Czech and Slovak monetary union has been in the spotlight again as the referendum vote on Scottish independence looms on Thursday. A similar currency union allowing Scotland to keep the pound is one of the targets of those backing independence.

Photo: CTKPhoto: CTK The Czech and Slovak divorce at the start of 1993 was initially supposed to be at the political level only. Prague and Bratislava had agreed that a monetary union and common currency, the crown, would continue after January 1 with a customs union and labour mobility between the two new countries also being prolonged.

The monetary union was intended to last at least six months with the possibility to keep it going longer. In the end, the monetary union survived the political split by only 38 days and was officially ended on February 8.

Unlike the mooted Scottish plan to continue using the pound without having a say in the running of the Bank of England or its policy making, the short lived Czech-Slovak currency union had established joint decision making. In fact, the Czechs had been generous: while the 2:1 split had proceeded for most Czechoslovak assets, the monetary board was split 50:50 between Czech and Slovaks.

The new Czech-Slovak monetary configuration did not, however, convince most of the onlookers, and in particular foreign banks and financial institutions. This was shown in the creation of a parallel exchange rate for the Czech-Slovak crown with the exchange rate to the US dollar at one time almost 80% higher than the official rate.

One thing the onlookers did not like was the existence of monetary union without political, and perhaps more crucially financial, union although there were a series of deficit, reserves, and currency flow safeguards underpinning the Czech-Slovak crown. It was a lesson the euro states were to learn the hard way around 15 years later.

And the newly created monetary double act did not convince Slovaks, for long living in the economically weaker part of Czechoslovakia benefiting up to 1993 from sizable cash transfers (there are differences between economists on how big they actually were) from the Czech side, either. Slovaks rushed to transfer their savings to Czech banks in the expectations the union would collapse and a future Slovak currency would devalue – which is precisely what happened.

Photo: Štěpánka BudkováPhoto: Štěpánka Budková The union could not survive such strain and the stark fact that the Czechs and Slovaks setting monetary policy were divided on what economic path the new countries should be steering. Slovakia, heavily dependent on armaments and other heavy industries was hurting badly under the new liberal economic regime being pushed in Prague. Unemployment had climbed to just over 10% in Slovakia, around four times the levels in the Czech Republic.

In the aftermath of the decision for the hurried currency divorce, in which different stamps were used to mark out banknotes in both countries and currency restrictions were imposed at the border to halt the cash Slovak tsunami westwards, economists have pondered the ashes of the 38-day long monetary union.

Some have said the union was doomed from the start because, even after so many decades together, the Czech and Slovak economies were so different and it was impossible for them to pull the same way in a common monetary area after the Velvet Revolution of 1989.

But away from the fateful Czech-Slovak experience, there have been monetary unions that have worked between separate countries. Take the little heralded case of Belgium and Luxembourg, sometimes known under the not too hopeful acronym BLEU (meaning a bruise or depressed state in French or well as the colour). This continued, happily for the most part, though there are some tales of the Belgians failing to warn the Luxembourgers about a devaluation or two before they happened, from 1922 until the countries joined the euro-zone together. In this case though, smaller Luxembourg represented no fiscal or monetary risk at all to the bigger Belgium, apart from the fact that its banks happily accepted suitcases filled with earnings not declared to the Belgian taxman.

17-09-2014