It took a long time for people in the UK to realise that the euro was a political issue and not simply about economics but as the single currency began to unravel, it became perfectly obvious that politics would determine if the currency even survived beyond last year. If economics had been the determining factor of membership of the club, countries like Greece, Cyprus and even Spain and Italy, would not have been allowed membership. Similarly, now that the issue of the currency to be used by an independent Scotland has finally caught the attention of both sides of the debate, it is obvious politics will be more important than economics because the currency is not simply a medium of exchange.
If Scotland votes Yes in the referendum, it will mean the re-establishment of the country as a nation state after 300 years of a Union which, according to one’s viewpoint, has been either a great success or an equally great failure. The currency to be used is a priority because no country can operate without some means of conducting trade with other countries or conducting the most basic business of everyday life, within its own boundaries. Like every other “new” state that has been established since the end of World War II, Scotland will have the choice of which currency to use. Not every country has chosen the same path, although every country has had to choose some path, and while some have chosen to use the currency of another country for the sake of some perceived advantage or convenience, the majority have chosen to establish their own.
In light of the confusion contained in what has passed for debate on the issue, much of it created quite deliberately, it is as well to set out the choices facing an independent Scotland. Like every other newly independent state, Scotland will have several options, including being able to continue to use sterling but will have absolutely no control over monetary policy, which will be determined by the Bank of England, without any consideration of the economic conditions prevailing in Scotland. The claim therefore, that Scotland would be forbidden to use sterling is a nonsense, but the consequences of taking such a road are perfectly obvious. Similarly, Scotland could use the euro on the same basis. The No Campaign has tried to argue that Scotland, if it retained membership of the EU, would be forced to join the euro but the mechanism does not exist to enforce euro membership.
Each “new” applicant for EU membership (it is still not settled whether or not Scotland would be considered a “new” applicant) must give a commitment to join the euro but a condition of membership is a transitional period of at least two years, in the new Exchange Rate Mechanism (ERM) but somehow, the EU has allowed the curious situation to prevail, where no compulsion to join the ERM exists. Poland has twice postponed entry to the euro and, while membership of the single currency was seen as an attractive prospect a few years ago, the mood in the country has changed considerably as the Polish economy has improved, at the same time as the single currency has faced increasing difficulties. No sensible argument can be made for euro membership either in the immediate or medium term and, the determination of Germany in particular, to have even greater concentration of control inside the euro zone, makes membership in the long term a particularly unattractive option, unless to those who favour a federal united states of Europe.
That leaves Scotland with the option of a formal currency union with the rUK or its own currency. Let us look at the former first, as there is more confusion surrounding this option, than any other. The preferred option of the SNP is a formal currency union with the rUK and, particularly in the past few days, they have made an increasingly strong argument in favour of this union. The No Campaign and the Treasury have made an equally strong argument opposing such a union and the strident tone of their opposition is such, that one has to wonder why Scots would find anything attractive in a continuing union with the rUK. The Chancellor in particular, has taken every opportunity to threaten Scots with the most dire consequences if they vote Yes next year. The SNP argue that it would be in the interests of both an independent Scotland and the rUK, to have a formal currency union, pointing out that the balance of payments of the rUK would benefit by over £40 billion per annum, that cross-border trade between both sides would continue uninterrupted and costs would be minimised. The most important aspect of this option for the Scottish Government is that they claim that Scotland would have control of fiscal policy, thereby allowing a Scottish government the freedom to initiate the kind of economic policies which would create economic growth and employment. A currency union based on sterling, is made to sound so attractive for both sides by the Government, that it is worth asking why either side would choose to change the relationship at some time in the future. Their commitment to a sterling zone does not suggest they would want to move towards ever having complete control of the Scottish economy.
The problem for the Scottish Government is that no one else agrees with them, not even the Working Party of the Fiscal Commission that it set up to produce a report on the currency issue. The Working Party Report suggests that a sterling zone would be in the interest of an independent Scotland “in the immediate aftermath of independence” but that a Scottish currency would be the best option to give maximum control of the Scottish economy. In order to create a successful sterling zone, the Fiscal Commission sets out the following conditions:-
- The Scottish Government has a formal input to the Monetary Policy Committee (MPC) of the Bank of England
- Interest rates are set to promote price stability across the sterling zone
- Financial stability is ensured across the sterling zone on a consistent basis
- A joint fiscal sustainability agreement is established to govern the level of borrowing and debt within the sterling zone
John Swinney, on behalf of the SNP, welcomed those conditions but claims that a Scottish government would still be free to follow economic policies, including taxation, to create growth and prosperity in the Scottish economy thereby “creating the fairer society we all seek.”. It is difficult to see how an agreement between two parties, as laid out by the Fiscal Commission, can allow one of those parties the freedom to follow its own economic policies, at one and the same time.
John Kay, an economist who at one time served on Alex Salmond’s committee of advisers, has been moved to ask, “It makes one wonder what independence means”. Tods Murray, in their recent paper on the currency said, “If an independent Scotland keeps the pound, there needs to be an appreciation that at best, Scotland will have limited control over monetary policy. The Bank of England could impose checks and balances on Scottish fiscal policy, debt, deficit, taxation and public spending which could amount to a loss of fiscal autonomy.” Jim Cuthbert, a well respected economist, in his paper “The Mismanagement of Britain”, calls on the Scottish government to reverse its policy on sterling in light of the current dangers faced by the pound and avoid Scotland being exposed to the “high likelihood of a potentially catastrophic crisis in the not-too-distant future.” He goes on to say, “meaningful independence is not attainable within the UK monetary union” and “Independence could potentially insulate Scotland from the worst effects of the impending economic crisis”.
If a sterling union was to be set up, great faith is being placed on two things; the first, a Scottish member on the MPC and the belief that a Scottish government would adopt and follow sensible fiscal policies in any case. It is claimed that one Scottish member on the MPC will be able to influence policy decisions to the extent that the most potentially adverse effects for Scotland, will be avoided. What appears to be forgotten is the relationship the MPC has with the UK Government and the Chancellor of the Exchequer, who must write to the Governor of the Bank of England at least once every 12 months, laying down the Government’s inflation target for the coming year and reminding the MPC of its remit under the Act. The letter is couched in the following terms,
“The MPC is accountable to the Government for the remit set out in this letter. Any changes to the remit will be set out in the Budget.”
That does not leave much room for interpretation and one Scottish representative is hardly going to make any impact on a committee which is a creature of the Government of the UK and whose remit is to achieve the Government’s target on inflation. What also requires some explanation is the faith being placed in an organisation whose record of setting interest rates over the past thirty years, leaves much to be desired in terms of the effects it has had on the economic growth in Scotland. Between 1995 and 2002, Scottish economic growth was 1.9% per annum as opposed to the 2.7% achieved by the rest of the UK over the same period. Any objective analysis would be hard pushed to find any period during the past thirty years, where the economic policies and interest rates set out by successive UK Governments, favoured Scotland. In every year over the past thirty years, economic growth in Scotland has been 0.5% lower than the growth rate in the rest of the UK.
In light of all of the above, the most sensible currency option for an independent Scotland would be a Scottish currency. In the past, any notion of Scotland having a currency of its own has been derided and as recently as a week ago, the usual sneering references were being made by the usual suspects, to the possibility of a Scottish currency with suggestions it could be called a “wee Eck”. It has been asserted Scotland is too small, it would be too difficult, it would cost too much and it would be either a petro currency floating on a sea of oil or, the oil price would make the value so unpredictable it would be unmanageable. More sensible and realistic assessments now recognise that small countries can manage their currencies just as well as the larger countries. The opening lines in the report from the Fiscal Commission states, “By international standards, Scotland is a wealthy and productive country. Even excluding North sea oil output, GVA per head of population in Scotland is estimated to be 99% of the UK average and the highest in the UK outside london and the South East. However, over the past 30 years, Scotland’s economic growth rate has lagged behind that of many of its peers.”
A nation’s currency is much more than a store of value, it is a measure of the status of a nation state and can even be viewed as an object of pride. The German, Swiss and Dutch currencies have all been used as reserve currencies in the past and many Germans and Dutch now bitterly regret having lost their own currencies for the sake of the euro. The success of Norway and Switzerland in managing their currencies is a measure of just how small countries can manage their own financial affairs for the benefit of their own societies. As those countries which were once part of the Soviet Union or were part of the eastern bloc such as Poland, become more successful, they become less and less inclined to give away their new found independence by joining the euro.
Why does New Zealand, a country with a population of 3.5 million insist on having its own currency, when there are economic arguments for having a monetary union with Australia? Canada, with a population of 33.5 million, exports over 82% of its goods and services to the USA and over 54% of its imports come from the USA, ratios which are far in excess of those that Scotland has with the rUK and the EU, but she guards her independence jealously, including her currency. The population of the USA is ten times that of Canada and all the arguments about being in bed with an elephant apply just as much as they do for the relationship between Scotland and the rUK. There are 221 currencies in the world with just over 60 in some form of currency union, either formal or informal but only 11 countries have the much vaunted AAA status. These include the following, Austria, Australia, Canada, Denmark, Finland, Germany, Netherlands, Norway, Singapore, Sweden and Switzerland.
How many large countries are included in that list?
An independent Scottish currency may cause a level of nervousness in the early stages of independence but with careful management and Scotland’s reputation for financial probity, together with our natural resources and international trading record, that nervousness could work to our advantage. It is the only option which will allow a Scottish government the degree of economic control necessary to diverge from the history of mismanagement of the Scottish economy since the end of World War II. If sovereignty means anything at all to the Scottish people, control of their own currency is a prerequisite.