THE really objectionable thing about the argument over Scotland’s currency is the scolding, high-handed manner in which it is conducted. There is a serious debate to be had about what currency Scotland should use if it becomes independent. There are arguments on both sides. But the way Unionists such as George Osborne and Ed Balls talk about it is as a schoolteacher to a rather dim child.
Ed Miliband has a particularly patronising way of talking about the currency. Very slowly. And seriously. About the risk. “If Alex Salmond gets his way.” And how it would be the very poorest. In society. Who would suffer. When interest rates and mortgages rise… ignoring the fact that it would be the rUK’s rejection of monetary union that would be the immediate cause of economic dislocation. We saw a taste of that this week as the pound wobbled on the international money markets.
There is a kind of demented glee on social media and in the Scottish press every time a Westminster politician announces that Scotland will not be “allowed” to use the pound, even though sterling is as much Scotland’s creation as it is England’s. The pound was, after all, the product of a partnership between two nations – Scotland and England – in 1707. The idea that one side could claim exclusive use violates the spirit of the very Union these critics claim to uphold.
Scotland is supposed to be a partner in the UK, not a colonial possession. When a partnership is wound up, the adult thing is for both sides to share assets and liabilities. When marriages dissolve, for whatever reason, both parties are supposed to seek the most reasonable and equitable division of common property. I don’t particularly like marital metaphors, but when a wife decides it is time to separate she doesn’t “walk away” from her right to the family home.
The idea of monetary exclusion is objectionable on every level. At its simplest, why would the half-million English-born people living in Scotland want to have to change currency every time they crossed the Border? And vice versa. Why would business want to pay the cost of changing currency for every export? A currency union is simply the most practical arrangement for two trading partners to manage their economic affairs when they occupy one small island. The rUK threatening to destroy the Scottish economy by undermining cross-border trade after independence is, as Professor Anton Muscatelli said in the Financial Times, “tantamount to economic vandalism”.
Yet, we are forced to look to the infamous Plan B because we are told England would behave irrationally after a Yes vote, and throw its monetary toys out of the pram. I don’t believe English people are like that. But even if they were, there is an erroneous assumption that an acrimonious and chaotic break-up of the UK common currency zone would exclusively damage Scotland. Not so. If the rUK were to lose one-third of its land mass, 90% of it hydrocarbon resources and most of its renewable energy, it would be in a difficult enough situation. However, if it were to compound this by ejecting Scotland from currency union it would also lose Scotland’s per capita share of the UK debt pile, around £110 billion. The Scottish exchequer would save around £5bn a year in interest payments.
At this point Unionists turn the scold-ometer up to 11. What a way to start independent life, they cry, with Scotland defaulting on her debts. An independent Scotland would become a pariah of the financial markets, shunned by the money lenders and forced to pay usurious interest rates in order to avoid a Greek-style default.
But this makes even less financial sense than the claim that Scotland would be exclusively liable for the debts of banks like RBS, which are already effectively London banks because 90% of their business is there. The markets aren’t sentimental. They look at the bottom line when it comes to financing sovereign debt. They would understand that it had been the unilateral action of the UK Government that relieved Scotland of its share of rUK debt. As Alex Salmond has repeatedly insisted, the Scottish Government is more than happy to pay every penny of the joint debt, so long as it remains in a currency union.
Anyway, the UK Treasury has already accepted 100% liability for the debts of the rUK. The Chancellor, George Osborne, reassured the markets of this before his Declaration on the pound in February. He knew perfectly well the implications of his monetary gamble. Relieved of this debt burden, the Scottish exchequer would arguably be in better fiscal shape than the rUK, which has one of the highest deficits in the Organisation for Economic Co-operation and Development.
At this stage in the game, the Unionists start to throw around words like “sterlingisation”, “Panamisation” and “banana republic”. They insist that Scotland would still become a basket case even though it had been relieved of UK debt, because it would be alone in a hostile planet with no currency to hold on to. Actually, Panama, which pegs the dollar, may be a poor country, but it has the 12th most stable banking system in the world, according to the World Economic Forum. The UK comes 86th..
Many countries effectively use other nations’ currencies – such as Hong Kong, which shadows the dollar; or Denmark, which shadows the euro. Sterling is an internationally convertible currency which Scotland is entitled to use. The Scottish Government would set up a currency board and issue Scottish pounds based on a one-to-one parity with sterling. Job done.
Ireland did this for 50 years after independence, and UK pounds continued to circulate as legal tender in the Republic. It only ended the arrangement when it joined the European Monetary System – something an independent Scotland might do in the long term. The eurozone isn’t going away. The rUK may even have to join it. But no-one wants economic war. It’s just not rational. The sensible thing would be for Scotland and England to have a common currency. But if England refused, there are plenty of alternatives. Switzerland doesn’t feel like a banana republic, and nor does Norway. The two rich countries are not in a currency union with anyone.
Scotland is not Greece. It does not have a sovereign debt crisis caused by fiscal irresponsibility, low productivity and corrupt economic management. Scotland has a versatile economy, one of the most educated workforces in the world and GDP per head which is already on a par with the south-east of England. If it was forced by rUK intransigence into having its own currency, there is no reason on earth why it shouldn’t work. True, the Bank of England would effectively set Scottish interest rates, but it would do that under any non-euro arrangement.
The oddest argument of all is that, if there were a currency union with England, this would “not be real independence”. Alistair Darling is fond of this line, perversely suggesting that the SNP aren’t really nationalist enough. He says that a country cannot be truly independent when another jurisdiction is setting its interest rates. But that is exactly what happens in the eurozone, where interest rates are set by the European Central Bank. You don’t hear France or Germany claiming that they are not independent countries because they have a common currency – the euro.
When the governor of the Bank of England, Mark Carney, spoke to Scottish business groups in January, he said that in many ways Scotland and England represented an optimal currency zone, because of similar productivity, business cycle, exports, GDP and so on. However, he said there would have to be a “ceding of sovereignty” to prevent one side having exclusive responsibility for bailing out the other. A central authority – the Bank of England – would have a degree of oversight over borrowing and bank regulation in an independent Scotland. Shock horror.
Except that after the governor’s speech, the Scottish Finance Secretary, John Swinney, said in effect: “OK with us.” Why was he so willing to give up Scotland’s economic autonomy? Because he knows that, in the modern global economy, national monetary sovereignty is largely an illusion. Scotland, as a small country bolted on to a much larger one, will have to accept it cannot set its own economic parameters. The alternative to the Bank of England is to join the euro – which is tougher.
Any way you look at it, for both England and Scotland, a currency union is the most sensible short-term option. But if rUK wants to play hardball, Scotland could throw as hard as anyone. Personally, I just hope it doesn’t come to that.