The currency of an independent Scotland: just how ‘independent’ would an independent Scotland be?

Alex Salmond’s Hugo Young lecture in London on Tuesday night was widely trailed, but doesn’t seem to have been very extensively reported after it was actually given.  The trails gave a misleading impression (at least to me) that this was going to be pushing a Devo Max scenario rather than independence.  What the audience actually got was a forceful argument for independence, for economic reasons more than anything else.  Independence would, we were told, give Scotland the chance to shape the economic environment to boost the Scottish economy, and that of its neighbours.  We were also told how closely connected to, and supportive of, England, an independent Scotland would be.  Little of this was very new – it’s been a common theme in SNP speeches, particularly Salmond’s, and Scottish Government documents for some time.

One of the few points that did seem new was Salmond’s position on an independent Scotland’s monetary policy.  He said Scotland would intend to keep the pound sterling and remain part of the ‘sterling area’, through a currency union if possible, through simply adopting the pound sterling if not.  (I briefly canvassed the currency options for Scotland in a short piece for the Scotsman here.)  Salmond pointed out that the Scottish economy resembles that of the UK so closely that this would cause none of the problems of different economic structures or cycles that have underpinned the Euro’s difficulties.  (He’s quite right about this.  Ironically, in most respects, Scotland is the part of the UK that is closest to the UK statistical average.  Wales, Northern Ireland and the regions of England diverge more from the UK mean more than Scotland in almost every respect, other than health.)  George Osborne has said that an independent Scotland wouldn’t be ‘allowed’ to use the pound, though Salmond is right to point out that the UK Government can’t actually do that if Scotland chose to adopt the currency of what would be another state, other than by draconian measures that might backfire economically as well as politically and diplomatically.

If there’s a rump UK-Scotland currency union, clearly Salmond’s preferred scenario (he pushed it again at FMQs on Thursday, claiming a rump-UK Chancellor would ‘bite Scotland’s hand off’ for it to keep sterling), it’s open to agree the terms of how that works between the two parties.  Of course there’s no reason why the UK would wish to do that before a referendum, and a soon-to-be-rump-UK Government might well be less inclined to be helpful to a seceding Scotland on this issue than the First Minister thinks it would.  If a currency union could be agreed, that would probably be quite effective from a Scottish point of view.  However, given the disparity in the size of the rump-UK and Scottish economies, it’s hard to see how Scotland would in fact get much of a say in monetary policy decisions driven by English concerns.  Lest anyone think these are purely technical in nature, remember extensive debates through the 1990s and 2000s about how interest rate policies were designed much more to address the working of the housing market in southern England rather than supporting manufacturing industry elsewhere.  (For a different view of how well such a British monetary union would work, there’s a letter in Tuesday’s FT from Drew Scott and Andrew Hughes-Hallett, available here.)

However, there are many reasons why Scotland ‘borrowing’ the pound sterling would be a bad idea.  It means foregoing control over a raft of the powers of a ‘normal’, independent state.  It’s also at odds with what the Scottish Government said about independence in its November 2009 white paper Your Scotland Your Voice, where they emphasised that independence would apply to monetary policy.  It means not just being subject to a predominately English monetary policy, also a sequence of related decisions – most notably, about whether and when to join the Euro.  Adopting sterling as the Scottish currency would hand these decisions back to the UK Government and the Bank of England (both part of what would be a separate state), whether they are done co-operatively through a monetary union or through its unilateral adoption by Scotland.  I raised this issue in the Question and answer session (as did Lord Myners).  Salmond’s response to this on Tuesday was to say that the key issue for Scotland was control of fiscal, not monetary policy.  In other words, the key point of independence is to secure full fiscal autonomy – not the full range of powers that have previously been canvassed as the point of independence.

A fiscally autonomous Scotland would be able to set taxes in order to spur economic growth (possibly at the expense of its southern neighbour) or pay for a different approach to public services, but wouldn’t necessarily be able to make its own decisions about matters relating to other aspects of macro-economic policy such as currency or interest rates.  While these might be appropriate choices for an independent Scotland to make, given its place in the wider world, this is not the image of independence that has discussed before now.  There’s also a question whether the means (becoming independent) match the end (fiscal autonomy).  Indeed, this version of independence increasingly looks like ‘Devo Max’ (or full devolution, as the 2009 white paper called it) – not statehood as it was understood even 20 or 30 years ago.

Whether this is a real shift in SNP policy, or just an off-the-cuff response to a tricky issue, will also become clearer in the coming months.  There will be a good deal more of this sort of thing over the next 2½ years, as the SNP become clearer about what they consider an independent Scotland would look like and do.  For all the arguments about ‘the tide of history’ supporting independence, there’s also a lot of unresolved detail about how independence might actually work.  The Scottish people (and those in the rest of the UK) need clear answers about them before the referendum happens.

UPDATE, 28 January: Perhaps prompted by this post, the Herald today has a story suggesting that the UK Government would, at a minimum, require extensive powers of oversight over an independent Scotland’s budget as a condition for agreeing to a currency union.  That’s available here.  The story is based on an ‘anonymous Whitehall source’, unsurprising given the Herald’s predilection for such stories, and comments by Professor Patrick Minford, once reputedly Mrs Thatcher’s favourite economist.  The story may be more mischief-making than anything, and it’s clearly part of the UK Government’s current strategy of demanding ‘basic answers’ about independence from the SNP.  However, it also illustrates just how far-reaching are the ramifications of the shift in the SNP’s position from their former one that an independent Scotland would take charge of its own monetary policy.

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11 Comments

Filed under Referendums, Scotland, Scottish independence, SNP

11 responses to “The currency of an independent Scotland: just how ‘independent’ would an independent Scotland be?

  1. Dennis Smith

    “Indeed, this version of independence increasingly looks like ‘Devo Max’ (or full devolution, as the 2009 white paper called it) – not statehood as it was understood even 20 or 30 years ago.”

    Exactly. Statehood as it was understood even 20 or 30 years ago no longer exists anywhere, partly but not entirely because of the financial deregulation of the 1980s. Whether this is a good thing is open to debate. There’s a strong argument that the financial deregulation of the 1980s is a main cause of the current global economic mess, a mess that the world still has to find a way out of. This is one reason why the line between independence and devo max can’t be clearly set out in advance – it’s something that Scotland, along with the rest of the world, has to work its way through. And this is likely to be a long and tortuous process.

  2. We’re only talking about the initial stages of Independence. Quite clearly Salmond is trying not to “frighten the horses” and provide a period of stability post-Independence to give us breathing space to decide what we really want and what is actually realistic. If the Euro stabilises, and, taking into account the enormous amount of trade we do within the EC, then I, and many others I’m sure, would favour eventual entry to the Eurobloc. If, on the other hand, the Euro does look like failing, or, at least, not demonstrating an advantageous position for us, then I’d be all in favour of our own currency and closer links to the Scandinavian economies. The pound is, in my opinion, a purely temporary measure. I have to admit to a certain sentimental attachment to the idea of the Scots Merk – 100 Bawbees to the Merk?

  3. Dru

    This is a very interesting point. Because the £ is not an international currency like the Euro, an independent Scotland that continued to piggyback on the £ would have no claim to expect a rump EW&NI to take any notice of it in whatever decisions EW&NI took in the management of either financial or fiscal affairs. If an independent Scotland got into financial difficulties, it would be like Greece only without the claims Greece has as a member of the Euro. It would have to pay its debts or default, on its own. It would have all the disadvantages of going back to gold, without the security of a fixed currency. EW&NI could devalue or revalue, and make major changes in monetary policy, without consulting it.

    There’s a sort of parallel with the way Eire dealt with currency before 1978, but it may not be as useful a parallel to the SNP as it looks. In those days countries still had fixed exchange rates, and the UK retained a commitment to what was known as the sterling area, which doesn’t exist any more.

    It would be a huge inconvenience and do a lot of economic damage to have separate currencies in the two countries, but the Irish banks have to manage this at the moment. Perhaps this just might inhibit the undoubted temptation of both sets of politicians to be b….. minded.

    Incidentally, as it’s in the news at the moment, if RBS hasn’t been sold by then, with either DevoMax or Independence would RBS become Scotland’s problem or EW&NI’s? Did anyone ask about this at the lecture?

  4. Who owns the Bank of England? If it is owned by the UK then Scotland will have a percentage share of that institution and as such will have more influence in its running than we have at present. Another question one has to ask is why they don’t lend directly to government at 0.5% rather than lend to other banks only who then charge 1,2+.% by buying government bonds.

  5. Angus McLellan

    The nature of the currency and the identity of the lender of last resort – isn’t it always the IMF anyway, sometimes with the BoE, ECB or Federal Reserve as intermediaries? – will be entrenched only to the degree that changing currency is a relatively complex and costly exercise and not something to be undertaken lightly. But in no sense is this a constitutional matter. A red herring I feel.

  6. Salmond is most likely correct that the rUK will ‘biting our hand off’. The rUK consume approx £40bn in oil each year, the bulk of which r tginates from the North Sea (nothwithstanding some exports and imports of foreign oil). If an independent Scotland adopted its own currency, say the Scots dollar, pegged 1:1 to the US dollar, then the rUK would have to find an extra $60bn of foreign exchange (circa 15% of its current external trade) each year to fund its oil purchases from independent Scotland. This is essentially the point he Gavin McCrone made in 1974.

  7. Steve Bell

    All commentators should bear in mind that it will be for the democratically elected Parliament and Government of an independent Scotland to determine the country’s economic and fiscal policies, as well as it’s defence policies, social policies, relationships with the EU, NATO etc. etc. It will be for the Scottish people to decide on these matters when the time comes. Meanwhile the focus should be on the primary question,’do you want Scotland to be an independent country’, not the particular policies of one political party. Most commentators do not appear to be able to differentiate on this matter!

  8. Pingback: Wings Over Scotland | What you won’t read today

  9. Pingback: Scottish independence lecture: Nicola Sturgeon on her best behaviour | Constitution Unit Blog

  10. Pingback: Nicola Sturgeon at UCL: the positive, England-friendly case for independence, and laying down a challenge on Devo More | DEVOLUTION MATTERS

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