Currency and credibility Anyone with even a passing interest in the Scottish independence referendum will know that the SNP have come badly unstuck on their currency plans. But the importance of this issue relates not only to the currency itself, but to a deeper and fatal flaw in the Nationalists’ plans: their lack of credibility. Before we get to that, however, let us cut through the bluff and the bluster about the currency and set out the true position as clearly as possible. An independent Scotland would have four currency options: (a) to enter a formal currency union with another state; (b) to use the currency of another state without entering into a formal currency union with that state; (c) to launch a new currency of its own; (d) to use the euro. The SNP’s preferred policy is option (a): to enter into a formal currency union with the rest of the UK, so that both the rUK and an independent Scotland would use sterling as their currency. It is not self-evident that this would be the best option for an independent Scotland, but neither is it self-evident that it would not be. Opinions on the matter differ. The argument in favour of this option is an argument of continuity. It fits with the SNP narrative of “seamless transition” to independence and with their strategy of seeking to “de-risk” it as much as possible. The argument against this option, from a Scottish perspective, is that it would substantially limit the Scottish Government’s room for manoeuvre. The lesson of the Eurozone is that currency unions work well only when they are accompanied with strong fiscal agreements between the parties. A core component of the case for Scottish independence is that the Nationalists wish to pursue fiscal policies significantly different from those adopted south of the border: much of the argument for independence has been framed as an argument against austerity. Yet, were an independent Scotland to enter a currency union with the rUK it would be unable to extricate itself from London’s fiscal policies. An independent Scotland could enter into a formal currency union with the rest of the UK only if the rUK considered this to be in its (that is, the rUK’s) national interests. Scotland could not force a currency union on the rUK. In February, the Chancellor of the Exchequer George Osborne gave a speech in Edinburgh in which he explained why, in his view, it would not be in the interests of the rUK to enter into a currency union with an independent Scotland. His Lib Dem and Labour counterparts, Danny Alexander and Ed Balls, issued statements in which they strongly agreed with Mr Osborne. Two considerations underscored the “three Chancellors’” conclusion: that a currency union would expose the rUK to risk without return and that, in any event, it could work only if accompanied with fiscal constraints that the SNP would never agree to. A currency union would put rUK taxpayers on the line for Scottish banks, asking them to underwrite guarantees on deposits held in Scottish banks. This would expose rUK taxpayers with there being little prospect of any benefit flowing in the other direction (for an independent Scotland could make little contribution to supporting an English bank). In the view of the three Chancellors, such a proposal would be clearly contrary to the best interests of the rUK. The SNP’s reaction to all this was angry disbelief. Decrying it as “bluff, bluster and bullying” they insisted that it was mere campaign talk and that the day after a Yes vote Whitehall would change its tune. The SNP repeatedly asserted that it would be in the rUK’s interests to agree a currency union, for the reason that not to do so would create unnecessary transaction costs for rUK business. The argument does not stack up, however, when it is recalled that only 10% of rUK business is with Scotland. Forty per cent of rUK business is with the Eurozone and nearly 20% is with the US, yet no-one argues these days that we should join the euro or adopt the US dollar. Nearly 70% of Scottish trade is with the rest of the UK – it would cost Scottish business dear were the two countries to use different currencies – but the costs to the rUK would be far less than those to Scotland. Contrary to the bluff and bluster of the SNP, there is no compelling business case that the rUK should enter a currency union with an independent Scotland and, as we have seen, there is a compelling political case that to do so would be contrary to the rUK’s best interests. Despite all of this the SNP have never accepted that a currency union – their preferred option for an independent Scotland – has effectively been ruled out. When asked for their Plan B the Scottish Government have sought to insist that they have no need for one, as Plan A would be delivered. Only in August did this always unsustainable position unravel, during the first leadership debate between Alex Salmond and Alistair Darling and in back-to-back FMQs in the Scottish Parliament. Under enormous pressure to explain what he would do in the event that no currency union with London could be agreed, the First Minister adopted as his default position that “it’s Scotland’s pound and we’re keeping it”. This suggests that Plan B is use of the pound without a currency union – so-called “sterlingisation”. This may be the worst of all possible options for Scotland. It would mean that an independent Scotland would be using the currency of a foreign power (as Panama uses the US dollar). It would mean that the Scottish Government would have no input whatsoever into monetary policy – Scotland’s monetary policy would be surrendered in entirety to a foreign power (and that foreign power would be acting in its interests, and not in those of Scotland, in determining what its monetary policy should be, of course). It would mean the Scottish Government would have no power to print money. Its borrowing would be in a foreign currency, making it inevitably more expensive. And it would mean that Scotland would have no central bank, making EU accession even more complex and more difficult to achieve. Sterlingisation would make life next to impossible for Scotland’s financial services industry, much of which would relocate south of the border, with potentially devastating consequences for Scottish jobs. Plan B, in short, would be a disaster. Just how catastrophic a disaster it would be has been spelled out by my Glasgow University colleague, the Adam Smith Professor of Political Economy no less, Prof Ronnie MacDonald, here. The First Minister’s rhetoric about the currency also leaves a great deal to be desired. Contrary to his bluster, it is not Scotland’s pound. It is not England’s either. It is the UK pound. As I have explained on these pages in previous posts, if Scots vote Yes to independence, what that means in legal terms is that Scotland leaves the UK. The rUK would carry on as the continuator state, using the public institutions of the current UK, including the UK Parliament, the UK Supreme Court and the UK pound. It is Scotland’s pound at the moment because and only because Scotland is part of the UK: leave the UK and Scotland would be leaving the UK’s public institutions, including the UK pound. Of course, there is little the rUK could do to stop an independent Scotland using the pound as the currency of a foreign power. But there is nothing at all that Scotland can lawfully do to compel the rUK into accepting a currency union given that the rUK considers it to be contrary to its interests to do so. In desperation, some Nationalists have suggested that if London were to refuse a currency union, then Scotland would retaliate by refusing to service her share of the UK’s public debt. This would be economic lunacy. A new Scottish state would have to work hard to establish its market credentials. To renege on its share of the debt would do the opposite, and would indicate that Scotland was irresponsible and heading for basket-case economics. But as well as being economic lunacy, it’s also legal illiteracy. The debt is a liability which would fall to be apportioned equitably between the two states in the event of independence, along with the UK’s assets. But the pound is not an asset, and neither is the Bank of England: these are institutions of the UK that would become institutions of the rest of the UK. To argue that “no currency union” somehow equals “no share of debt” is to confuse assets/liabilities with institutions. It is a basic legal error. It would be like going to a supermarket and saying “if you won’t give me a share of your business I won’t pay you for the groceries I’ve placed in my shopping trolley”. Currency is fundamental. The unit of exchange in which we are paid our wages and which we use to purchase goods and services and to pay our rent or mortgage goes to the core of what we do every day as ordinary citizens. That the SNP cannot tell us what currency we would be using in an independent Scotland or the conditions under which we would be using it is, of itself, fatal to their cause. But it is not an isolated example. It is but one of several instances in which the Nationalists do not have the answers and in which they lack credibility. They cannot tell us how their immigration policy would be compatible with continued membership of the Common Travel Area. They cannot tell us how, how quickly, or on what terms an independent Scotland would accede to EU membership. They cannot tell us how they would tackle the fiscal deficit that an independent Scotland would suffer from. They cannot tell us why the rest of the UK would wish to share key public services with a foreign state. Currency is fundamental. But, even more than that, it is the SNP’s lack of credibility that will be their downfall.
Posted on: Tue, 09 Sep 2014 08:59:12 +0000
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