Peter Geoghegan: The road to financial safety

As small businesses struggle to find support from the banks, Peter Geoghegan suggests now is the time to look at an alternative way to finance retail firms

It’s official: the UK is back in recession. On the day Rupert Murdoch was appearing in sack-cloth and ashes before the Leveson inquiry in London, the Office for National Statistics (ONS) announced that Gross Domestic Product (GDP) in the UK had shrunk by 0.2 per cent in the first three months of 2012. Following a similar contraction in the final quarter of last year, we have returned to recession, at least technically.

In stark contrast to the juicy revelations from Leveson, the news that the UK is in recession caused barely a ripple in the media pond. Some commentators argued that the ONS figures were misleading, adducing an increase in manufacturing activity in recent weeks. Others asserted, with some justification, that GDP is a remarkably unsophisticated measure of economic vitality, best taken with a generous pinch of salt.

Health warnings aside, the fact remains that the UK economy is in pretty poor shape. Overall employment across Britain stands at 8.3 per cent. A recent labour market report from the Scottish Trades Union Congress (STUC) shows joblessness among people aged 18 to 24 at a five-year peak. But you don’t need to be a policy wonk, or wade through reams of statistics, to realise that the economy is flatlining: just saunter around almost any Scottish city or town. On once-thriving shopping streets, retail units lie either empty or under-used. The “for sale” signs, so ubiquitous during the credit bubble, have been replaced by offers to rent property, often at bargain basement prices. According to the business consultancy the Local Data Company, shop vacancy rates in Glasgow are currently running at 21.2 per cent, a rate surpassed in some West of Scotland towns.

The empty high street store – most likely erstwhile home to a branch of a major retail chain that has either gone under or downsized dramatically – provides the starkly eloquent image of this spectre of uselessness today.

The retreat of retail can be attributed to a plethora factors – the rise of online shopping, an overall reduction in disposable income in straitened times – but among the chief culprits is the difficulties faced by those key drivers of the economy, small and medium-sized enterprises (SMEs).

Last week, the Bank of England released a three-year assessment of “trends in lending” by banks to businesses and individuals. The findings were stark: lending to SMEs has decreased markedly since mid-2008. Lending to all small and medium sized enterprises has been negative since 2009. All five major high street banks in Britain have failed to achieve their government-agreed targets for lending to small firms.

To be fair, it’s a problem that the Scottish Government has acknowledged. During a Holyrood debate back in February, finance minister John Swinney excoriated the failings of Project Merlin, the Westminster-backed scheme which has led to just 4.8 per cent of gross lending going to Scottish SMEs, despite small businesses in Scotland accounting for 6.4 per cent of the UK total. “It is clear that Project Merlin has failed to address poor lending conditions for Scottish companies and this needs to be addressed by the UK Government,” said Swinney.

As Britain sinks into the dreaded double-dip recession, it’s obvious – or at least it should be – that creative solutions are required to reinvigorate small businesses (and the economy more generally). Banking reform, and the redirection of capital away from speculation and into productive activity, is an imperative. But beyond waiting for root and branch reform that might never happen, how can we stimulate Scotland’s local economies quickly?

Issuing local currencies is one innovative option. The theory behind local currencies is straightforward: national notes are exchanged (usually on a one-to-one basis) for a specially created local denomination that can be used to buy designated goods and services in a geographically defined area. Local currencies are perfectly legal and can be very efficient ways of increasing economic activity, especially in times of economic or political crisis. Since they don’t accrue any interest, local currencies generally circulate at a much faster rate than national currencies. They also retain money in the local economy and encourage consumers to buy local produce.

When they work, the effects of local currencies can be impressive. In Switzerland, the WIR Bank has existed as an independent complementary currency system for small and medium sized businesses and retailers since 1934. Having begun with just 16 members, WIR has grown to 62,000 users with assets of around 3bn Swiss francs (£2bn).

Germany currently has about 30 local currencies. Damanhur, an eco-community of about 900 people in northern Italy, has been using its own currency for decades, tied first to the Italian Lira and, more recently, the euro.

Damanhur runs on a similar model to Scotland’s oldest and most successful local currency, the eko, which circulates among shops and businesses in the Findhorn eco-community in Moray. Established in 2002, the eko has proved remarkably resilient: about £20,000 worth of currency is currently in circulation. The notes have a set life-span, usually between three and five years, at the end of which they can be redeemed for new issue ekos or, in rare cases, sterling. Capital raised by each eko issue is used to fund low or no interest loans to community projects such as wind farms and affordable housing.

In the wake of the financial crisis, local currencies have gained traction elsewhere in the UK. In 2009, the first urban local currency was launched in Brixton, London. The Brixton pound has been one of the success stories of the area’s regeneration: more than 70 local businesses accept the stylishly designed notes, which have become a symbol of the area’s burgeoning cultural confidence. The Bristol pound is due to launch soon.

Local currencies, popular in the US during the Depression, have also been making a comeback across the pond. The most successful, BerkShares, circulate in Berkshire County, Massachusetts, with the participation of five local banks. BerkShares retail at 95 cents for a $1 share, an attractive saving that increases the currency’s appeal to customers.

Edinburgh, with its proud history of independent retailers and niche shops, seems like an excellent testing ground for a local currency. The notion of a special currency for the capital is not exactly new. Last year, Transition Edinburgh drew up plans for an Edinburgh pound, which the council broadly supported.

Unfortunately, enthusiasm for a local currency in Edinburgh was muted, not least due to a lack of confidence amongst business people and shopkeepers. A Portobello pound, due to launch this year, is currently on hold. A similar local currency scheme in Hawick in 2010 had limited success.

Arguably the main reason why local currencies have struggled to get off the ground here is a paucity of information on how they work and why.

The Greens remain the only political party actively campaigning for their establishment inScotland.

Local currencies are not a panacea for all our economic woes but they could help lift some of the fug that surrounds our high streets. As the double dip hits, the time to think creatively about our economy – and local currencies – has arrived.