The currency question
And when the Westminster ‘No’ often doesn’t mean ‘No’.
Unionists insisting Scotland would not be allowed another independence referendum have recently appeared to change their tune, now wanting to decide the franchise for indyre2 and bombarding social media with the old chestnut questions of 2014. ‘What currency will you use” is at present one of the favourites.
In 2014 the options were laid out in Scotland’s Future, with the Scottish Government under Alex Salmond’s leadership opting for keeping the pound within a currency union. Keeping the pound was considered more reassuring for the electorate, less disruptive, less of a change by sticking with what people were used to. And no doubt there were some who remembered decimalisation and the unwelcome hike in prices that resulted. A currency union was perhaps considered the safe option.
In February 2014 Chancellor George Osborne threw a damper on this decision by ruling out a currency union with an independent Scotland, warning, “if you walk away from the Union, you walk away from the pound”. Despite Scottish Government assurances that any country could use the pound as it was a fully tradeable currency, a large black question mark had been raised in the minds of the public. Apparently Sir Nicholas Macpherson, the Treasury’s top civil servant, “strongly” advised Osborne against agreeing to the currency union proposal, which he said would have been “fraught with difficulty”.
The same Sir Nicholas Macpherson, said he believed impartiality guidelines did not apply in “extreme” cases like the Scottish Independence referendum. “Her Majesty’s Treasury is by its nature a unionist institution.”
The screws on a currency union were further tightened when on the 9th of September 2014, just over a week before polling day, Mark Carney, Governor of the supposedly independent Bank of England, warned that an independent Scotland could not enter a formal currency union to use the pound.
Odd then, that by 22nd May 2018 the same Mark Carney stated to the House of Commons treasury committee that it would be economically possible for an independent Scotland to have a currency union with the rest of the UK but it would be for others to decide whether it was politically desirable. So Carney going back on the political line he had crossed in 2014.
In July 2016, just over three months after stepping down from his treasury position, Sir Nicholas Macpherson said in a Times article, Architect of No campaign now backs Scottish independence (this article was based on one in the FT on 8th July 2016 – The case for Scottish independence looks stronger post-Brexit), that Brexit presented an extraordinary opportunity for an independent Scotland to attract skills and investment and that the UK’s decision to leave the EU “changes terms of debate north of the border” where Nicola Sturgeon had bolstered the Scottish government’s “fiscal credibility” since she took charge.
EU membership would provide access to the biggest market in the world
The original FT article pointed out that Brexit provided an opportunity for Scotland to reasses its economic prospectus. EU membership would provide access to the biggest market in the world without the raft of uncertainties that will bedevil rUK for many years into the future. To succeed an independent Scotland would not want to tie its currency to that of a country determined to distance itself as much as possible from the EU, so Sir Nicholas advocated the creation of a Scottish pound and a central bank. Such an arrangement might see Scotland then following in Denmark’s footsteps where its central bank shadows the euro. With its own currency Scotland could respond to any oil shocks as “Interest rates and the Scottish pound could take the strain smoothing any adjustment in the real economy.”
An independent Scotland’s wish to rejoin the EU at an early date would attract inward investment along with highly skilled migrants, allowing it to grow its economy.
Sir Nicholas ends his FT article by reflecting on the aftermath of the EU referendum and the lessons to be learnt from that, top of which he places an economic strategy with a long-term vision. Such a plan would make winning a referendum more likely, and allow Scotland to hit the ground running when it rejoined the EU.
So, proof that when the Westminster says ‘No’ it often doesn’t mean ‘No’.
In an article in the National on 14th July 2016 Michael Fry referred to Macpherson’s article, and went on to write:
Far more important, in Nick’s view and in mine, is that we should set about a programme of economic convergence with our European friends and neighbours, to show them we mean business, to make us more acceptable to them as full members, and to cash in on their undoubted sympathy for Scotland’s plight in being dragged out of the EU against its will. Once on the path of convergence,we will of course be pushed off from time to time, as fresh economic crises arise. That should not stop us constantly proclaiming our determination to stick to the long-term plan.
It will let us cast away the begging-bowl mentality that renders economic arguments with Westminster so futile, and start to think bigger. We need that growth agenda I have called for in earlier columns, an agenda that will make us a normal European country and rather than a rundown suburb of London, a bit scary though too far beyond the M25 for Westminster to worry about. But 400 miles north is where we will be finding our golden opportunity.
And so the wheel has turned again. This time it’s Andrew Neil, stalward defender of the union and all things Tory, that has stuck his oar into the swirling currency waters. Yesterday he posted a series of comments on Twitter. Richard Murphy, well known chartered accountant and political economist, considered these were aimed at taunting the SNP on which currency it might use after independence. Murphy said Neil had “hit a target”. In response this thread by Richard Murphy explores that issue.
Richard Murphy’s thread on currency
Andrew Neil is right to raise this. He knows that without its own currency an independent Scotland would not be an independent state. It couldn’t control interest rates, borrow without substantial risk, or have real control of its fiscal policy. That would be intensely harmful.
Despite this the SNP leadership say they are committed to ‘sterlingisation’ as a policy post independence. That is the use of sterling for a considerable period post independence.
The SNP leadership says this will provide stability and reassurance on a key issue. People, they think, are frightened of a Scottish currency so they are seeking to take the issue out of contention. But as noted, in the process they take independence out of contention too.
The SNP membership rejected the leadership’s position on this at a conference. They have opted for a policy of transitioning from sterling to a Scottish currency as quickly as possible – which means weeks or a few months at most – after independence.
Andrew Neil clearly thinks a Scottish currency would break Scotland, and lead to referendum defeat. He thinks the currency issue is an each way bet for him and that it kills the issue whatever option is chosen. He is wrong.
History is full of examples of newly independent countries successfully launching new currencies, either on, or within weeks of, independence. The history is current, too. To claim this is not technically possible is wrong then.
But is it economically feasible? Neil claims it isn’t because no one would lend to Scotland. It would, he claims, have no credit rating. But that is absurd. First, Scotland may not need to borrow. It will inherit none of the UK national debt, which will belong to the rest of the UK as the successor state. And it will only contribute to UK interest costs at current low rates.
So Scotland will start life without debt and with a very low interest contribution made as a gesture of goodwill, which will mean its interest spend will be exceptionally low. That’s good for credit rating.
Second, Scotland has a strong and continuing legal system already in use and a functional tax system it can use, even if it would want to transform it (I hope). So it will have a tax revenue stream.
And Andrew Neil should know that credit ratings are based on income streams, so Scotland will be in a good position. And that income stream will be entirely collected in Scottish pounds. That will be the only currency for payment.
Third, Scotland will have foreign currency reserves on independence as people in Scotland transfer their current balances into Scottish pounds, all voluntarily, because those will be what they need.
Whilst, fourth, debts to banks in Scotland, including mortgages, will be converted to Scottish pounds because that will be the condition for those banks continuing to operate in Scotland under Scottish banking regulation.
And fifth, this will then let Scotland use QE if the money markets don’t play ball.
And sixth, Scotland could then set its own interest rates, if it so wished, including differential rates for depositors and borrowers, again if it so wished.
And seventh, Andrew Neil forgets that Scotland remains an energy powerhouse with a boom in renewables about to happen, with a neighbour on its market desperate to buy. The chance that this currency will be weak is very low in that case. The issue may be its strength.
Eighth, that then gives no incentive at all to join the euro, even if EU membership is sought, and this situation is easily engineered and tacitly accepted by Brussels.
So what is the real issue Andrew Neil is addressing? I’d say it’s obfuscation. The SNP needs to tackle this issue and make clear how and why it can and will address it – playing to all Scotland’s strengths instead of giving Neil a chance.