Independent Scotland and Sterling
Following the news that George Osbourne, Danny Alexander and Ed Balls would come together to formally reject currency union post Independence I felt it necessary to revisit some previous reading on Sterling and the Referendum.
The SNP in their White Paper prefer to maintain the British Pound as Independent Scotland’s currency. Short term I’m not opposed to currency union with the rest of the UK (rUK), but long term a new Scottish currency would be preferable, allowing full economic autonomy. Perhaps peg it to the pound for a bit. There are many other options. That’s the beauty of Independence. We can decide. Having said all that, I disagree with the bullying and scaremongering the Government and mainstream media are encouraging and perpetuating around currency. It’s not for a Government we never elected to try to frighten us and distort the debate. It’s political posturing. Economics suggests currency union would be in the interests of an Independent Scotland and the rest of the UK.
‘Bank Of England’ is a misnomer; it should really be called the ‘Bank of the United Kingdom’. The Pound is a shared asset of the UK; around 9% of it belongs to Scotland. It is owned in proportion to population by all of the people of the UK. Scotland has contributed to it, so why shouldn’t we have some claim to it post-Independence? The Bank Of England has already agreed to, indeed proposed, talks. Mark Carney, the Governor of the Bank of England, politically independent, recently visited Edinburgh and gave a speech where he explained the benefits of currency union, that it would be desirable for both parties. He even went on to say that the Scottish economy is stronger relative to the rest of the UK.
Carney is not alone; many economists have come out in favour of currency union. Scotland and England comprise what economists call an ‘optimum currency area’. The independent Fiscal Commission Working Group support currency union. Likewise Deutsche Bank AG and Citigroup Inc:
‘Scotland fits an optimum currency area with the rest of the U.K. very well… For the pound, Scottish independence is not particularly significant for the rest of the U.K.’ -Oliver Harvey, London-based strategist at Deutsche Bank, the world’s biggest currency trader, 27th November 2013
An Independent Scotland would be one of ruK’s biggest trading partners; if Independent Scotland keeps Sterling it reduces transactional costs for business on both sides. Similarly, Scottish exports, particularly oil, are a huge component of the UK’s balance of payments, since buyers would require Sterling to buy oil.
James Mirrlees, part of the independent Fiscal Commission Working Group that looked into currency options for an Independent Scotland said:
‘A continuation of sterling in its present area, which would be a benefit for all parts of the UK, is surely the most logical option.’
The same Fiscal Commission also noted:
‘the timing of the constitutional debate, and the nature of relationships and partnerships in the modern global economy, mean that much of the detail of any framework will be subject to negotiation with these partners post the referendum. In that respect, it is important to acknowledge that political considerations will play a role and may cloud pre-referendum comments and policy statements. However, these are likely to differ from the actual decisions taken post referendum when agreement is likely to take place where there are common interests.’
Even Alistair Darling, figurehead of Better Together, has previously supported currency union as recently as 10th January 2013 on Newsnight Scotland:
‘Of course it would be desirable to have a currency union… If you have independence or separation, of course the currency union is logical.’
The Treasury has already tacitly accepted currency union by confirming it will maintain liability on all UK debt in the event of Scottish Independence. In other words, the debt belongs to the UK. Any debt taken by an Independent Scotland would be negotiable, not mandatory. If we can’t share in the assets, why should we share the debt? There is a convincing argument that Independent Scotland shouldn’t take any debt. If it’s not a ‘continuing state’ then it has no debt obligation. This would not be a default by Scotland, nor would it be seen that way by the international community.
Iain Macwhirter calls it ‘economic hardball’ by rUK; a ‘reverse default’. If there’s no asset share, there’s no debt share. It’s not a debt transfer either; it would be a negotiated payment. Independent Scotland has to achieve the best economic outcome possible and other countries would respect that. Indeed, with abundant natural resources and no debt, Independent Scotland would be a very attractive investment. Conversely, if rUK were seen to ‘replace sound economic analysis with sentimentally’ as Christine Bell puts it, that could have a very negative impact on rUK as viewed by international markets.
Even the Adam Smith Institute, not a natural bedfellow for a (more) left leaning Independent Scotland, doesn’t see Osbourne’s speech as particularly troublesome:
‘An independent Scotland would not need England’s permission to continue using the pound sterling, and in fact would be better off using the pound without such permission.’ ‘It’s up to Scots to decide whether they want independence, but the Chancellor’s announcement today should be seen as a feature, not a bug.’
They would advocate Independent Scotland uses Sterling in such a way as Panama uses the US Dollar. ‘Permission’ is not even required: as Sterling is a fully convertible reserve currency, Independent Scotland could choose to use it without any agreement from rUK. Osbourne called Panama ‘not the strongest precendent’, but he’s quite wrong again. Panama is one of the fastest growing countries in the world, with growth of 10% in 2012, ‘the most competitive economy in Central America and second in Latin America’ according to the 2013-14 World Economic Forum Global Competitiveness Report. The report goes on to assert Panama is seventh in the world out of 148 countries for the stability of its banks.
This latest move by the Government is nothing more than bullying and intimidation. It’s fearmongering. As well as being wrong, it could backfire horribly for the No campaign. Does Osbourne really want customs controls and currency exchange at the border? It’s not going to be popular with business either side of the border as it’s going to increase costs. While our own local and national media fails to offer balanced coverage or any real critical analysis of Osbourne’s speech, international media roundly viewed it as threatening. Scottish people don’t like being threatened. Who does?
Strategically the No campaign would seem to have played their hand too early; the Yes campaign has over 7 months to get people used to a ‘Plan B’, most likely a Scottish pound pegged to Sterling as in the Panama case above. It might also reduce a potential source of internal conflict in the Yes campaign and a stick with which the No campaign have enjoyed beating Yes in the mainstream media. Some also predict Devo Max enthusiasts and others on the fence will be pushed towards Yes, turned off by the politics of fear.
Politics – not economics, not the best interests of the people of the UK – was the driver behind Osbourne’s speech. Henry McLeish said,
‘This is entirely political and of course consistent with the unionist campaign. This is negative; it is about spreading fears and scare stories.’
Looking ahead, 2016 is a long way off. A lot could happen between now and then. What the UK Government says now doesn’t necessarily apply after the Referendum, especially as they have refused to ‘pre-negotiate’ the terms of Independence. Mervyn King, the former Governor of the Bank of England has said as much: that the Treasury position will be ‘entirely different’ after Yes. As Patrick Harvie put it,
‘The Chancellor can’t predict what the 2015 UK Government will do about Scotland and currency union.’
Osbourne might not be the Chancellor by 2016. Nor Balls or Alexander. Right now, despite promises of not getting involved, the Government are campaigning against Independence and this is part of it.
Osbourne’s denial is not in keeping with the Edinburgh Agreement. It’s a further assertion that the United Kingdom is not a Union of equals. It’s a thinly veiled threat that the rest of the UK will obstruct Independent Scotland on the international stage, as the Permanent Secretary to the Treasury noted:
‘… the debt is one of a number of issues which would have to be settled post independence, where the new Scottish state would require the cooperation of the international community including the continuting UK.’
It’s the worst ‘Lovebomb’ ever. I’m still not sure that rUK really would harm itself to punish Scotland. Nevertheless, Independence offers choice. Sterling is not the only option. Sterling is expensive. Not using Sterling could allow for more radical change, with greater power over monetary policy and exchange rates, and greater ability to revive Scottish exports and manufacturing.
Scotland’s Independence is much bigger than currency. It’s about progressive change, and building a fairer, greener, more socially just Scotland, where every one can prosper. We can do that with or without Pound Sterling, and with or without permission from rUK’s ruling elites. Another Scotland is possible, another Scotland is coming. Our Scotland, for all of us.
(all available as of 14 February 2014)
Christine Bell, Currency Reflections: The Legal Issues | Future of the UK and Scotland: The Referendum Debate. 2014. http://www.futureukandscotland.ac.uk/blog/currency-reflections-legal-issues.
Rev. Stuart Campbell, Wings Over Scotland | The killer inside. 2014. http://wingsoverscotland.com/the-killer-inside/.
Rev. Stuart Campbell, Wings Over Scotland | Turn and river. 2014. http://wingsoverscotland.com/turn-and-river/.
David Leask, As Others See Us: World Press on Osborne’s Currency Gambit | Herald Scotland. 2014. http://archive.is/weWRQ.
Gordon MacIntyre-Kemp, The Scottish Pound and the Illusion of English Money : Business for Scotland. 2014. The Scottish Pound and the Illusion of English Money : Business for Scotland. http://www.businessforscotland.co.uk/the-illusion-of-english-money/.
Gordon MacIntyre-Kemp, Carney visit adds to good week for Yes Scotland : Business for Scotland. 2014. http://www.businessforscotland.co.uk/carney-visit-adds-to-good-week-for-yes-scotland/.
Gordon MacIntyre-Kemp, No Campaign’s political posturing on currency lacks business sense and economic credibility. Business for Scotland. 2014. http://www.businessforscotland.co.uk/no-campaigns-political-posturing-on-currency-lacks-business-sense-and-economic-credibility/.
Iain Macwhirter, Osborne’s politics of Dirty Harry on currency union | Herald Scotland. 2014. http://archive.is/RNdHV.
Robin McAlpine, C’mon Scotland. 2014. http://www.cmonscotland.org/.
Sir James Mirrlees, Analysis: Benefiting the UK is most logical option – The Scotsman. 2014. http://www.scotsman.com/news/analysis-benefiting-the-uk-is-most-logical-option-1-3304617.
Lukanyo Mnyanda and Rodney Jefferson, Pound Bid of Scots Nationalists Supported by Traders: Currencies – Bloomberg . 2014. http://www.bloomberg.com/news/2013-12-02/pound-bid-of-scots-nationalists-supported-by-traders-currencies.html.
George Parker, Robin Wigglesworth and Mure Dickie, Treasury gives debt pledge on Scotland – FT.com. 2014. http://archive.is/k7x0s.
Adam Ramsay and Peter McColl, Scotland should relish the chance to run its own currency | openDemocracy. 2014. http://www.opendemocracy.net/ourkingdom/adam-ramsay-peter-mccoll/scotland-should-relish-chance-to-run-its-own-currency.
Peter Spence, Osborne’s claims that Scotland couldn’t use the pound don’t stack up | City A.M.. 2014. http://www.cityam.com/blog/1392289544/osbornes-claims-scotland-couldnt-use-pound-dont-stack.
Comment: An independent Scotland would be better off using the pound without permission | Adam Smith Institute. 2014. http://www.adamsmith.org/news/press-releases/comment-an-independent-scotland-would-be-better-off-using-the-pound-without.
Bella Caledonia. Curious George . 2014. http://bellacaledonia.org.uk/2014/02/13/curious-george/.