How Sound is Salmond’s Scottish Pound?

One of the more tiresome aspects of the SNP’s vision for the future of Scotland is its fondness for breezily sweeping away awkward questions as though important elements of Scotland’s prospects as an independent nation were nit-picking details that need not delay anyone from setting out on the road to Independence. It sometimes seems as though weather warnings do not exist or, if it is conceded they do, they should be seen as what they are: biased forecasts designed to prevent Scots from reaching their bright future. There are, you see, few clouds and fewer storms to trouble our bonny and blithe travellers.

But some of these warnings are important and reasonable. One of them, to which the SNP has yet to offer an answer that is politically and economically convincing, is the currency question. Here, for instance, was Stephen Noon (an important member of the SNP’s policy team) writing about the currency question earlier this month:

Scotland already has a currency – its called the pound, aka sterling, aka £. On independence day that will remain our currency.

Lets be clear, the London government doesn’t have exclusive ownership. It is as much our currency as it is the rest of the UK’s. Any suggestion that a Tory government in London will have to give us permission to use sterling is just absurd. Decisions on sterling’s future use will not be for London to take unilaterally, they will be for Scotland and the rest of the UK to take together.

And what about the Bank of England, aka the UK’s central bank? Some might argue that because a Scot created it, we should take ownership after independence . . . but that wouldn’t be fair!

The UK’s central bank is something Scotland and the rest of the UK own together – we must not forget that. This means the rest of the UK does not have exclusive rights to the institution, or an exclusive say on its future. The Bank of England was a private company nationalised after the Second World War. Scotland will be entitled to its share of this asset and, as ‘part-owner’, Scotland will be entitled to representation (something we don’t have just now).

The fact is that the notion of an independent Scotland with sterling as its currency, setting its own taxes, raising its own borrowings and fixing its own interest rates free of the chafing constraints of the rest of the UK is for the birds. Such an “independent” Scotland would only be a little less constrained than now.

Markets would also need to be assured that commitments to inflation-targeting and the pursuit of monetary stability were not at risk. In a febrile world, buyers of government debt would need convincing it was “business as usual”. But is “business as usual” the goal and purpose of this long march to Scottish independence? I only ask.

Meanwhile, the BBC’s Douglas Fraser is sailing in the same waters:

The question, then, is whether sterling would be used in Scotland without any say over the RUK pound, or if a currency settlement would have to be agreed between an independent Scotland and the RUK.

If the latter – similar to Latin American countries that use the US dollar, without having any power over the US Fed’s policy – Scotland would simply have to take whatever monetary policy was laid down at the Treasury and Bank of England in London.

If a deal were sought with the RUK, it would be a small version of the euro common currency. And what we’re learning from the crisis is that there have to be robust systems for co-ordinating fiscal and monetary policy.

Think through that negotiation on fiscal and monetary limits between an independent Scotland’s finance minister and the Chancellor of the Exchequer. It’s not just about setting up the rules of engagement at the outset, but a permanent process of co-ordination – or of conflict.

The deal-making would put a limit on each partners’ borrowing limits, and the deficits they’re allowed to run up. It would mean limits on how much money could be printed, and it’s hard to see Scottish banknotes continuing to hold the same value as Bank of England ones.

So what do you think: would the London or the Edinburgh minister have the stronger negotiating position?

Meanwhile, as Fraser observes, views elsewhere in europe on tax harmonisation may make it more difficult for small countries such as Scotland (putatively, should she join the euro) or Ireland (presently) to set taxation at attractively competitive rates. Of course this may change but it seems probable that an independent Scotland will be severely constrained whatever answer is given to the currency question. It’s not “anti-Scottish” to point this out, nor to note that it marks the further rout of the SNP’s (rump) fundamentalist wing.

These issues are not my area so I don’t pretend to have the answers either. In any case, we don’t know how many currencies there will be in europe come 2014 or 2016 so the rules of engagement may have changed by then anyway. Nevertheless none of the solutions – including, eventually or perhaps, a Scottish currency of oor ain – to all this are cost-free.

Now it’s true that the SNP’s evolving definition of independence (in which Mr Noon has been an important voice) is both a recognition of the limits of independence in the modern world and a political ploy to smooth over difficulties and awkwardness and anything else that’s even moderately discombobulating or unpleasant. This is reasonable enough even though not all such problems can be breezily dismissed as so much tedious detail best ignored while we savour the broad, sweeping rush of history in the making.

Nevertheless, there are times when, in terms of rhetoric and the framing of the debate, the nationalists might do well, at least from time to time, to acknowledge the transitional costs Scotland would face and admit that though there will be some storms ahead they will pass and the future will be sunnier than you might think. Or, as Chris Dillow writes about other matters:

It is, in theory, quite reasonable to say “state B is superior to state A, but the costs of moving are prohibitively high. So let’s stick with A.” But, I suspect, few people take this position. It’s far more common to conflate the adjustment costs with the argument that B is actually inferior to A even as a steady state.

From a nationalist perspective or frame, State B is Independence and State A the Union: in the past, the “adjustment costs” of moving to State B have been considered prohibitively expensive. The SNP’s task should be to stress that despite the short-term costs the medium and longer-term advantages of moving to State B make doing so worthwhile.

But if they insist there are no costs then they risk treating the electorate as fools. This is, admittedly, not always the worst idea but it is rarely an elevated or ennobling one.

Final thought: Trident submarines are a card to be played in any putative independence negotiations. Whatever they say at present, it would not surprise me if an independent Scotland offered the Rump UK a 25 year lease to keep the submarine fleet on the west coast of Scotland. The subs are a bargaining chip of great worth and, as such, not to be thrown away lightly. Greater currency stability in exchange for letting the subs stay? That’s a bargain, however hypothetical it might seem right now, the SNP should take.