A lawyers analysis on currency in the FT. The only way to keep the £ is to Vote No. Scotland and Sterling — whose currency is it anyway? This guest post is from Charles Proctor, a partner at lawyers Fladgate and an acknowledged expert on the legal aspects of money… ———- Who “owns” sterling? With the date of Scotland’s independence referendum fast approaching, the debate over a currency for an independent Scotland has reached fever pitch. Amid much talk of currency unions and “Plan B”, Alex Salmond has boldly asserted “…it’s our pound and we’re keeping it …”. Good politics, perhaps, but bad law. It is true that, on the independence of Scotland from the remainder of the UK, international law and practice would require the two sides to negotiate an equitable division of assets and liabilities. But – both for economists and lawyers – a monetary system is simply a medium of exchange. In other words, cash is an asset for the person who holds it, not for the central bank that issues it. The sterling monetary system is inextricably linked with the Bank of England, which manages and oversees the currency. However, upon Scotland’s independence, the central bank and other national institutions will remain exclusively with the United Kingdom. The legal expectation is that, consistently with its newly acquired independence, Scotland will establish its own institutions. So clearly, Scotland has no self-standing legal right to a “share” of the pound, or of the Bank of England. A sterling monetary union would have to be negotiated between the UK and Scotland, and would have to stipulate for fiscal and economic policies designed to ensure financial and monetary stability within the new sterling area. As experience in the Eurozone has clearly demonstrated, agreements of this kind are very difficult to implement and enforce – the chief obstacles being statistics, voters, national pride and a Micawberish hope that “something will turn up”. This may explain the reluctance of the Westminster parties to entertain this structure. With no right to a “share” of the pound, or to a sterling monetary union, Scotland’s options are already limited; they will be further restricted by its application for EU membership. Where can it go from here? “Sterlingisation” First of all, Scotland could continue to use sterling on a unilateral basis – indeed, any country could use it, without the UK’s consent. However, the necessary sterling would have to be earned through trade surpluses. Scotland would not be able to issue sterling banknotes, nor would it have a central bank to “backstop” its financial institutions. It would also be bound into the monetary and exchange rate policies that the remainder of the UK chose to adopt. But there may be even more fundamental problems. As Olli Rehn has recently pointed out, sterlingisation would be inconsistent with Scotland’s application for EU membership. The accession arrangements now commit all incoming EU Member States to joining the euro at some point. Scotland could not deliver on such a commitment because it would have no central bank and would be unable to join the EU’s exchange rate mechanism. The process also ultimately involves the substitution of the euro for the currency of the incoming Eurozone state – impossible, if Scotland does not have its own currency. Some Member States have deferred Eurozone membership by various means, but none have positively disqualified themselves from it. Sterlingisation would disqualify Scotland – it could never fulfil the Eurozone entry criteria. Scotland’s application for EU membership would thus depend upon an exemption from the EU’s core project to which all other incoming Member States have been required to subscribe. Under current conditions, the EU will not wish to give Scotland a UK-style “opt-out” from the single currency. Sterlingisation would thus be a major obstacle to EU membership. A new currency Mr Salmond has long been pressed for his “Plan B” for the currency. In one of the televised debates, he said “…we could have a Scottish currency. We could have a flexible currency like Sweden or Norway. We could have a fixed rate, Scottish pound attached to the pound sterling. That’s what Denmark does with the euro and Hong Kong does with the dollar…”. This was presented as “three Plan Bs”. In truth, it is only one plan – a new Scottish currency. Whether a country has a fixed or floating currency, or a linked exchange rate regime, are incidental matters that flow from the decision to issue a new national currency. Adopting a new currency may carry numerous risks, but it would be more consistent with aspirations to national sovereignty and independence. In the end, the desire for EU membership will mean that a new Scottish currency is the only game in town. How could the EU possibly accept a commitment to join the single currency from a new Member State whose internal arrangements automatically disqualify it from graduating to the Eurozone? And how can the EU waive a requirement imposed on 12 new Member States over the last ten years? The currency debate is crucial but it has been clouded and confused by the political needs of the moment. A new currency is the only choice that will secure EU membership for Scotland.
Posted on: Mon, 15 Sep 2014 07:34:54 +0000
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