[Updated below] This is one of the crunch issues in the will-we-won’t-we debate on the independence referendum.
Today, 23rd April, in a well flagged position, UK Chancellor, George Osborne came to Scotland to raise issues around whether or not Scotland would retain the pound were it to decide to leave the Union on 18th September next year, 2014.
With plenty of advance warning on what the Chancellor was to say it was no surprise when First Minister Alex Salmond was, literally, on his toes at his residence in Bute House in full rebuttal mode.
The issues being batted around are things like whether Scotland would be permitted to use the pound; whether so-called ‘Scottish’ banks would be permitted still to print their own branded currency notes; and the risks to Scotland and to the then three nation Union if Scotland were using the pound. Some of this is essentially fluff but some has substance.
Basically, Scotland, may, if it so wishes, use the pound anyway – but without the benefit of the Bank of England acting as lender of last resort – a very necessary guarantee for an emerging country, both for its residents and for its lenders.
If Scotland wanted – and it would need – the reassurance of being a member of a full currency union, it would have to cede control of monetary policy to the Bank of England.
This raises two major issues:
- Monetary policy governs what is possible in taxation, spending and borrowing – so where would any genuine independence come from in having monetary policy decided outside the country?
- Our current situation is that the Bank of England controls monetary policy throughout the Union. So what would be different in the major essential of statehood between the way we are now and the way we would be if we voted for independence? The difference would be the level of debt we would incur from the huge set up costs of all aspects of an independent state – added to our inherited share of the national debt [£110 billion] – all of which we would have to service alone.
The risks to a Scotland either in using the pound without the Bank of England as lender of last resort or as the user of a brand new currency are the steep initial costs of borrowing – to service the serious debt level noted above.
Without a guarantor, our use of either of these currency modes would mean that our loan charges would be much higher than those paid by the UK – because we would be an unknown factor. That’s the way lenders set their rates. It’s not a one-size-fits-all thing. We would have to earn our way to lower borrowing rates by becoming a reliably secure growth economy – and there is no economic development strategy before the public at the moment. No one currently knows how we would propose to manage our economy.
Of course it is in the interests of the UK as a whole that we have a currency union.
Who wants to visit family and friends or buy goods and services from either side of the border – and get into the faddle of currency exchange rates and having the right currency for the moment in your pocket.
But we’ve already got that ease of movement and purchase because we are already part of a currency union. Why go into serious debt to achieve the appearance of independence and the right to live as we currently live?
If Scotland were to opt for independence, of course the three nation UK would make a currency union possible, whatever the disingenuous George Osborne or anyone says in the games-playing of the moment.
They UK would, however, have to protect itself from risk from the unpredictable performance of a new state. It would have no choice but to require monetary policy to continue to be controlled throughout that union by the Bank of England – and Scotland would have no choice but to accept that.
If an independent Scotland were sufficiently strategically unhinged as to join the eurozone and adopt the euro, we would simply have our monetary policy determined by the European Central Bank rather than the Bank of England – and there would be no way around that for either side.
In fact, German Chancellor, Angela Merkel, is yesterday reported as saying that eurozone member states must accept that the EU will have to govern national budgets. She said: ‘We seem to find common solutions when we are staring over the abyss, but as soon as the pressure eases,, people say they want to go their own way. We need to be ready to accept that Europe has the last word in certain areas. Otherwise we won’t be able to continue to build Europe.’
The First Minister’s rebuttal took some pretty fantastical turns, managing – simply by saying so - to sever tax and borrowing from the influence of monetary policy.
He also did his usual chucking into the ether of various sums of billions of pounds to ridicule any risk from Scotland to a currency union.
But the problem here is that this too is smoke and mirrors.
Scotland is not potentially a much richer country than the rest of the UK.
Gross Domestic Product [ GDP] which is calculated from the revenues of, for instance the oil, whisky and salmon farming industries, is not a true or a safe measure of our wealth. Why? Because almost all of these industries are owned outside Scotland and the revenues are exported.
Conversely, earnings generated by Scottish companies operating elsewhere, are repatriated here and do not figure in GDP.
GDP per head is therefore not an accurate way to measure standards of living.
If you use GDP per head as such a measure, it is correct that, in 2010 and in the developed countries within the Organisation for Economic Co-Operation and Development [OECD] a separate Scotland would have come 6th, where the rest of the UK would have been 15th in the list.
However, if you use the much more accurate indicator of gross national income per head as your measure, a 2010 list of the countries in the OECD with the highest standards of living, would have seen a separate Scotland and the rest of the UK in equal 13th place.
A study from Glasgow University’s Centre for Public Policy for Regions [CPPR] has just concluded that, were Scotland to become independent, standards of living would be no better than they are at present.
So the First Minster’s fast segueing to the balance of payments in his televised response to the Chancellor at lunchtime today, simply disguises the fact that the CPPR study emphasises: that the issue here is neither for nor against independence per se, but is the imperative to have far greater clarity and consistency over how the Scottish economy is measured, were it to be an independent state.
Update 21.00 23rd April: The First Minister also said today: ‘These negotiations [Ed: the currency Scotland will use] will take place after [Ed: his emphasis] the vote.’
This means that the First Minister seriously expects responsible Scots, voting on an irreversible decision on their country’s future, to take that decision with no idea whether the country would go on to hand over to another authority – the Bank of England or the European Central Bank – the responsibility for its governing monetary policy.
In such an event they would not get anything like the independence they thought they were voting for. They would have been asked to vote on a false prospectus – and, tellingly, a knowingly false prospectus.
There will be some who vote blindfold but these days these are far fewer than in days of yore. This is a concerned electorate that will interrogate the key issues – and, quire reasonably, the financial issues are the heart of the matter.
The most idiotic suggestion of the day was a carefree Patrick Harvie, Convenor of the Scottish Greens. On the currency issue, Harvie actually said Scotland might introduce a new currency of its own very gradually and over a much longer time. What right would a separatist Scotland have to expect the three nation Union loyalists to let us use the pound for as long as it suited us, alongside introducing something else as yet unknown.
And how exactly would we introduce it ‘very gradually’? Would our children get mixed currency pocket money to improve their maths on exchange rates – a bit of the GBP and a bit of the newbie?
And which currency would be used to pay the pensions the Cabinet Secretary for Finance himself is on the record as saying he is concerned Scotland may not be able to afford?
Would the Bank of England act as lender of last resort for our use of the pound – while who exactly would underwrite our use of the newbie currency?
And the First Minister and the Greens Convenor are frontline figures in the Yes Scotland campaign. Are the lifejackets under the seats?