Currency options: the facts behind the debate

The major hoo-ha about the pound in an independent Scotland has generated a mass of confusing debate. Thankfully the STUC’s ‘A JustScotland’ paper at last shines some light on what the real currency issues are.

What is clear is that no option for currency is without problems.  Here we try to distil some of the issues from the STUC report.

When looking at these options it is important to keep in mind that the status quo (without independence or enhanced devolution) brings its own problems and restrictions too.

The STUC argues that the level of integration between the Scottish and the rest of the UK  (rUK) economies, uncertainty over the balance of payments in an independent Scotland and direction of policy following the Eurozone crisis, makes none of the options ‘wholly compelling’. 

Sterlingisation

This would be a decision to continue using sterling without the explicit agreement of rUK. The report says: “A unilateral decision to use a currency without any access to or influence over the institutions of monetary control - is not a viable option for a nation at Scotland’s stage of economic development particularly one with such a highly developed financial sector.”

The Euro

The Euro’s benefit of smaller transaction costs with Europe would be ‘more than offset’ by higher costs with the rUK which is by far Scotland’s biggest trading partner. Scotland would have to have its own central bank with little influence over the ‘largely unaccountable’  European Central Bank. There would be severe limits on economic policy

A new Scottish currency

The STUC agrees that in the long term this would give most control over fiscal and monetary policy.

However, the transition would be ‘fraught’ and would probably need even more austerity until the currency won confidence. The STUC calls for more detail on how proponents would see this working and outlines the serious risks involved for a new currency on day-one - not least the risk of not being able to borrow at acceptable interest rates.

Currency union with rUK

The STUC sees this as ‘a sensible approach in the circumstances in which the newly independent nation is likely to find itself in 2016’. However, while attractive for Scotland, it is not all that attractive for the rUK

This is a complex issue involving issues like the share of assets from the Bank of England, share of debt, say over fiscal policies etc.

The report goes into detail covering the loss of economic sovereignty through having to rely on a central bank in another country and the difference in size meaning Scotland would have little real say, especially as economies diverge as the Scottish Government envisages.

The crisis in the Eurozone has led to a view that currency unions should work towards banking union and eventually political union. This is not what proponents of independence envisage.

The STUC argues that if Scotland is to accept its share of debt it must also get a fair share of assets including gold and foreign exchange reserves.

But it warns that an independent Scotland would no longer be able to rely on the Bank of England to bail out Scottish based financial institutions or be a lender of last resort because it would now be in a different role - that of a central bank ‘backstopped’ by rUK taxpayers.

Despite these concerns, the STUC says the UK Government was wrong to so categorically rule out currency union, however it questions whether the inherent lack of control can be reconciled with most voters’ understanding of independence.

There. That’s made it all clear for you, hasn’t it?

Published in Scotland in UNISON 12/03/2014