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Thoughts on an independent Scotland’s currency

Scottish banknoteI am somewhat mystified by the argument from the Scottish National Party that in the event of Independence they want to keep a shared currency union with the UK. Although I have made no detailed study of the issue, I am surprised that after decades of arguing for Independence, the Scottish nationalists seem so under-prepared to give answers to some quite fundamental questions.

The disadvantages for the UK would be obvious, that the UK taxpayer would remain the guarantor of last resort for Scottish banks, while they would have no democratic constraint upon the regulation of those banks.

The financial sector abhors uncertainty, and there would certainly be a motivation for banks and insurance companies currently based in Scotland to remain in the UK, even if that meant moving their operations southwards in the event of independence. Even currency union would only mediate or obviate that perceived risk if it were believed to be permanent, and the experience of the disunion of Czechoslovakia and the rapid breakdown of the currency sharing arrangement between the successor republics shows that permanence could not be considered a stable assumption.

Alex Salmond is of course correct to argue that all the peoples of the UK have contributed to the stability of Sterling, but he is foolish not to see that Scotland’s continued enjoyment of the benefits of Sterling is contingent on its continued union with the UK.

In any event, constitutionally, state sovereignty resides in the British parliament, as successor to the English parliament who gained that position by force of arms in the seventeenth century. That sovereignty is indivisible, and while Scotland can leave the UK, subject to necessary legislation, that process of gaining independence cannot constrain the future sovereignty of the British parliament , nor the subsequent independence of the UK without Scotland. If Scotland votes for independence, then Britain will assume that it means it, and it will be for the United Kingdom to decide whether currency union is in Britain’s interest, without necessarily giving much weight to Scotland’s preference in the matter.

A proposed currency union would also mean that Scotland would continue to have its exchange rate set by the economically more dominant Britain, which for good or ill has in recent decades pursued a policy of high Sterling exchange rate to support the City of London, to the cost of manufacturing jobs in Scotland, Wales and the English regions outside the South East. This is a highly qualified concept of “independence”

An independent Scotland, with an independent currency, would be at risk of flight from the financial sector, (as well of course as being certain to lose most and eventually all jobs directly related to the UK military). However, control of the currency could be used to devalue and thus boost domestic manufacturing, provided the capacity for expansion and start ups exists, but only at the price of increasing import costs, and thus consumer prices; and this option would be contingent on guaranteeing continued EU membership. This would effectively be to position Scotland as a lower net wage economy than England, alongside the anticipated lower corporation tax. It would be hard to see how this could be achieved without further constraint on public expenditure, and increasing salary inequality to retain core skills.

The mooted Plan B, of continuing to use the Pound, but without any currency union, similar to the relationship obtaining in the Irish Republic to 1979 is Quixotic, as it would lead to Scotland having less future economic independence and influence than it currently exercises within the United Kingdom.

Scotland’s path is seemingly unusual in another respect as it is seeking to become an EU accession state without any intention of joining the Euro. It will be interesting to see whether the prospect of another EU state outside Euroland, and therefore inevitably siding with the UK as a break against further integration, is welcomed in Berlin and Paris.

This article first appeared at Socialist Unity

4 Comments

  1. Jon Lansman says:

    I’m not sure what you mean by the “stability of Sterling”, Andy. The pound has fluctuated against the euro wildly in the 15 years since its launch in 1999 – at its height, €1 was worth 57p but at the bottom almost 98p. The dollar in the same period has been worth from 48p to 72p. All currency valuations are relative, and relative stability is of greatest importance with a country’s most important trading partners – although sometimes the ability to adjust exchange rates is also important.

    The risk of flight of the financial sector from Scotland seems grossly exaggerated to me. Scottish banks could preserve both their London Stock Exchange listings and their Scottish HQs whatever happens. Their ownership is in any case likely to be and remain very much more English than Scottish anyway. There would clearly be a need for an English (or whatever adjective will be appropriate for the residual UK) subsidiary if they were independent. Santander has one covered by UK savings protection, why shouldn’t RBS?

    Why would a Scottish Pound similar to the Irish Pound between 1928 and 1978 (when it joined the ERM) “lead to Scotland having less future economic independence and influence than it currently exercises within the United Kingdom”? Even if it was pegged to the pound (as the Irish pound was until 1979), it can be unpegged (as the Irish pound was in 1979). That fact seems to me, unquestionably, to increase the level of independence although I generally think the whole concept of “independence” is a chimera which is why I’m unpersuaded by the SNP argument for it.
    I don’t know how the EU issue would be resolved but the SNP used to be in favour of the Euro (which I’m not) and having the Euro really would reduce not increase its independence.

    It seems to me that so many of the statements on economic issues of the Better Together parties are really just politically motivated, barely disguised lies or threats, that I would not be surprised if they turn out to be a major incentive to vote yes.

    If Scotland votes yes, Labour north and south of the border would have to review their positions on all these matters and may end up taking very different lines. They certainly should.

    None of this convinces me of the arguments for independence, though it does convince me that Better Together was a terrible idea whose reality is even worse than could have been expected. Bring on Devo Max Max.

  2. Graham Day says:

    Sterling hasn’t fluctuated wildly. It was “pretty stable” at one level up until 2007, and has been “pretty stable” at a different level since 2009 (http://www.google.co.uk/finance?q=GBPEUR&ei=05MOU8iCIcaIwAOQwQE). Something may have happened in 2008, dunno what.

    The domicile of a bank has implications regarding the implicit guarantees they receive from their central banks. These grant them a commercial advantage. There are obviously other forces at play, but the fact is that there are no barriers to the Scottish financial sector relocating south (post referendum but pre independence), and it would in fact be very easy for them to do so.

    The Irish Punt is a non-sequitor. The initial peg was in a very different world of a gold standard. The removal of that peg was a result of Ireland entering the ERM. Ireland has never had an independent monetary policy. But that’s a problem for Irish nationalists, and not for us.

    If you want to claim that the “statements on economic issues of the Better Together parties” are “lies or threats” then it would be nice if you gave an example, so we could all make a judgement.

    Anyway, Scotland isn’t going to be voting “yes”, so it’s all moot.

  3. David Ellis says:

    You’ve joined the Tory scaremongers Newman. Short hop from the SWP to New Labour to bullying con I suppose.

    If in the event of a Yes vote and a refusal by the Rump UK to negotiate new federal bodies to replace the Bank of England to keep the currency union then of course Scotland would have to go ahead with its own currency. Simple as. At least then the Scottish would not be the taxpayer of last resort for the bankrupt City of London who printed their own `currency’ in the trillions during a thirty-year `monetarist’ credit bubble.

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