Published on March 14th, 2014 |
by Luke Cannell
Image © Scottish Government 2007 http://commons.wikimedia.org/wiki/File:AlexSalmond_2007.jpg
‘If Scotland walks away from the UK it’s also walking away from the pound’: A look into Scotland’s currency options.
Ahead of the forthcoming referendum on Scottish independence, UK Chancellor George Osborne has said voting in favour of an independent Scotland would mean leaving the pound.
The statement was made after the Treasury’s latest publication, which analysed a pound sterling currency union between the UK and an independent Scotland. The report argues that the continuing UK would be at a ‘much greater fiscal and financial risk from a separate state.’
Labour Shadow Chancellor Ed Balls and Liberal Democrat Chief Secretary to the Treasury Danny Alexander, have both publicly supported Osborne’s stance on the pound in an attempt to strengthen support for the union. This was unsurprisingly met with criticism from Alex Salmond, who has accused the Tory-led government of using ‘bully’ tactics in a bid to intimidate Scottish voters.
Yet, the threat of a pound-less Scotland has increased the pressure on the Scottish First Minister and the credibility of an independent Scotland. Scots are now urging Salmond to reveal alternative fiscal options, should the UK not agree to a currency union.
Alex Salmond could opt to unilaterally use the pound in the absence of a monetary union.
Following the comments of Osborne, the First Minister argued that an independent Scotland would continue to use the pound even if Westminster refused to enter a currency union.
In response, Better Together’s Alistair Darling has warned that ‘sterlingization’ would leave Scotland in the same category as Panama and with a future of economic dependence and second rank financial institutions. Although Panama can be seen as a successful example of dollarization, those who unilaterally share a currency are usually small territories or economies in transition who want to borrow credibility.
This approach would question the validity of an independent Scotland. The continued use of the pound in an informal union would leave Scotland with no control of monetary policy, with little influence and without a central bank to stand behind. The Fiscal Commission states Scotland under such a model would accept interest rates set in London, and the Bank of England would be under no obligation to act as lender of last resort to Scottish banks.
A more progressive option could be the creation of a new Scottish currency.
Alex Salmond has long compared Scotland to their Nordic neighbours Norway, Sweden and Denmark due to their size and economy. Those three countries have their own currency, and Scotland could look to them as a blueprint to follow. Although the transition would ultimately be difficult, the Fiscal Commission believes ‘in the long run, the creation of a new Scottish currency would represent a significant increase in economic sovereignty, with interest rates and exchange rate policy being two new policy tools and adjustment mechanisms to support the Scottish economy.’
The transition could be made easier if Scotland pegs their new currency to the pound sterling. This has been seen in the past and present. Ireland did this during their first 50 years of independence. Hong Kong has maintained a link to the US dollar since 1983, and the Danish krone has been fixed to the euro since the formation of the euro zone.
Yet, as mentioned, Scotland would face difficulties. Firstly, the uncertainty of how a new currency will perform could harm the independence campaign as voters could be reluctant to take the risk. Scotland would also need to win the confidence of the markets; this would see initial higher interest rates than the rest of the UK and tough controls over spending. In addition, should Scotland refuse to share debts if they cannot share currency, it could shatter relations with the UK and have wider implications internationally.
The final and least likely currency option for an independent Scotland could be the euro.
The euro has traditionally been the SNP’s preferred currency. However, in recent years the euro has become less attractive following its troubles across Europe.
Scottish Finance Minister John Swinney has already stated he ‘cannot foresee circumstances in which an independent Scotland would want to join the euro.’ Whether an independent Scotland would want to join the euro or not, they may not be eligible to join, at least initially.
In order to join the euro you must meet a number of conditions, such as price stability, public finances, exchange rates and interest rates. These rates are not currently available for Scotland individually, only for the UK as a whole. Furthermore, joining the euro would require Scotland to have its own currency which has demonstrated its stability and been a member of the Exchange Rate Mechanism for at least two years.
With the referendum fast approaching, Salmond and Osborne are playing a high-stakes game of political poker with Scotland’s financial future. Although Alex Salmond insists there is no Plan B, he will need to outlay an alternative currency should an independent Scotland fail to agree to a formal currency union with the UK. The longer this takes the more it could harm the ‘Yes’ campaign; with a handful of businesses already threatening to move south of the border should Scotland become independent.
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