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.