Does an Independent Scotland Need its Own Currency?
Australian Republicans scored a famous own-goal in the 1990s when, in their eagerness to win a referendum on the proclamation of a Republic, they put to the electorate a proposal for a ‘minimalist’ Republic. Determined to placate the median voter’s aversion to ‘too large’ a constitutional change, they proposed that nothing should change except that the English Queen be replaced as Head of State by an Australian. Alas, they had not thought things through. The problem with a minimalist constitutional agenda is that, while moderate sounding, it has a tendency to set off a chain reaction of questions that cannot be answered both adequately and in a manner consistent with the well-intended ‘minimalism.’ The result is that ‘minimalism’ can very easily turn off the hearts and minds of potential supporters of constitutional change without attracting, in compensation, enough support from those fearful of any change.
In Australia the first uncomfortable question that followed the ‘minimalist’ Republic proposal concerned the method of electing the Head of State. A direct election would, naturally, lend the office of Head of State a degree of kudos that was deemed incompatible with the severely circumscribed role of the Governor General (the Queen’s representative in Australia). To prevent this departure from ‘minimalism,’ the Australian Republican Movement recommended that the Head of State be elected by Parliament. However, this prospect put off many republicans. Indeed, the referendum was lost, in spite of the fact that the opinion polls were pointing to a majority preference for a Republic over the Monarchy’s preservation. Indeed, while no monarchists changed camps because of the ‘minimalism’ on offer, many republicans stayed away, disheartened that the proposed Republic was insufficiently…republican.
Alex Salmond and the SNP are making precisely the same mistake in proposing a ‘minimalist’ Scottish Independence.
In a bid to settle the electors’ nerves about the effects of a ‘yes’ vote on the economic sphere, the recent White Paper “…commends to the Scottish Government retaining Sterling as part of a formal monetary union, and believes that this provides a strong overarching framework for Scotland post-independence.”
Clearly, the soothing message to those who fret about their post-independence savings and purchasing power is: “Nothing will change, except that Scotland will be liberated from Westminster to pursue social justice policies that England has increasingly ditched.” Unfortunately, just like in the case of Australians’ republicans, the SNP has not thought things through.
The question is not whether the Scottish government will be able to twist England’s arm (perhaps by threatening to walk away from the UK’s public debt) so as to be allowed to stay in the Sterling zone. This is the wrong debate to have. The real question, that is already surfacing, is whether Scotland should want to share the Bank of England, as the recent White Paper sets out to do. The question for the people of Scotland is: If political union must precede a successful monetary union, as the Eurozone crisis has demonstrated so vividly, does it make sense to want to preserve a monetary union prior to dismantling a political union? The answer is unequivocally negative, turning the White Paper into unionism’s unwitting ally.
Suppose for a moment that London bows to Scottish demands that the two countries share the Bank of England, appointing a governing body of Scottish and English central bankers in proportion either to population sizes or to national income shares; and even renaming it the Bank of England and Scotland (BoE&S). Presently, following the Credit Crunch, the Bank of England pursues energetically a policy of quantitative easing, supporting Westminster with copious purchases of Treasury-issued gilts. Once Scotland begins to issue its own bonds, as an independent country must do, the question is: How will the BoE&S decide on the mix of gilts and Scottish government bonds that it will purchase? Is this matter to be left to the discretion of the English-majority governing board, thus rendering Scotland’s independent fiscal policy a sham? Or will some fixed ratio be devised, again limiting Edinburgh’s fiscal leeway?
Moreover, when the current ‘unconventional’ monetary policy comes to an end, with interest rates rising to ‘normal’ levels, how will this ‘tapering’ decision be reached? The English governors will always vote in favour of higher interest rates in tune with the London-based economy and its tendency to create real estate and financial bubbles. Unlike in the European Central Bank’s governing board, where no country can ever have an absolute majority, in the BoE&S Scottish governors will be consistently out-voted, the result being Scottish interest rates that are permanently too high for Scotland. With Scottish growth thus artificially restrained, Edinburgh’s fiscal policy will have to remain contractionary so as to meet the European Union’s deficit and debt limits, if the White Paper’s commitment to remain part of Europe is to be fulfilled. Without its own central bank to back its bonds, the Scottish government will be constantly threatened with rising bond yields; a scenario that bodes ill for a nation thirsty for national sovereignty.
Then there is the question of the banking sector. The Bank of England’s new governor, Mr. Mark Carney, has recently made it clear that he has no quarrel with the idea of a burgeoning City of London, not even with the prospect that the assets of England’s banking sector come to represent nine times Britain’s national income. Will an independent Scotland wish to remain pinned on the mast of such a financialised, and thus unstable, mega-vessel? What degree of influence can Edinburgh hope to have on the evolution of an English banking sector that is increasingly decoupling from the UK monetary union’s real economy? Next to none, I submit.
Of course, the problem with banks works both ways. Who will recapitalise a Scottish bank, post-independence, in case of a future banking crisis, possibly one caused by the City of London? The English Treasury cannot be reasonably expected to foot the bill while Edinburgh will probably not have the capacity to do it, at least not without its own bonds ending up the same way that Ireland’s did in 2010. In which case, a downtrodden Scottish Prime Minister will have to rush to London, cap in hand, resembling a cross between Brian Cowen and George Papandreou.
None of the above are arguments against Scotland’s independence. They constitute reasons why a ‘minimalist’ Independence, of the sort proposed by the Scottish government’s White Paper, will fail either to inspire the Scottish people to vote in favour of Independence or to deliver genuine independence if the referendum is won. Scotland must bite the bullet and fearlessly seek to establish its own currency. The fact that, due to an historical accident, there already exist Scottish pounds in circulation makes a monetary de-coupling technically simpler. Edinburgh ought to declare its intention to create a Scottish Central Bank and a temporary currency board that will peg the new currency to sterling before, once cross-border capital movements have been stabilised, the Scottish pound is allowed to float freely and Edinburgh’s monetary authorities set Scottish interest rates with a Scottish inflation target in mind. All this can be done unilaterally, without bullying London or seeking its permission. Meanwhile, the real negotiations can commence regarding the distribution of the UK’s national debt burden as well as the crucial issue of banking jurisdictions.
As the referendum approaches, the people of Scotland must decide whether the current political union with England and Wales is consistent with their aspirations. To an outsider, it seems perfectly reasonable that they should not to want to remain part of an historically charged political union with a much larger nation that, over the past three decades, has shifted away from a once commonly cherished social justice agenda. However, the Scottish government should understand that these aspirations are served badly by its ‘minimalist’ White Paper. It should absorb quickly the lessons that Australia’s republicans learned the hard way.
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