Money makes the world go round but some money is more valuable than others. In our monetary society, the choice of currency has an impact on what a modern nation-state can and cannot do. As SNP members come together over the next few weekends across the country to discuss the findings of the Sustainable Growth Commission (SGC), the currency an independent Scotland will use is likely to be one of the most debated and controversial parts of the whole process.
For those of us living in Scotland in 2014, the issue of which currency an independent Scotland would use was one of the biggest weaknesses of the Yes campaign. What we proposed was that upon independence, Scotland would enter into a formal currency union with the Rest of the UK (RUK). The 2013 Fiscal Commission outlined how this would work, what it would look like, and why it was in Scotland’s interest to pursue a formal currency union with the RUK. Although it made economic sense, the idea was dead the moment it entered the public domain as the UK government rejected a currency union out of hand.
Since September 2014, a lot has changed. The EU has had to deal with the migrant crisis due to conflicts in the Middle East and North Africa. Austerity across the UK and Europe has encouraged populism across the continent. 2016 saw the UK vote for Brexit based on lies and imperialist delusions, whilst across the Atlantic a controversial election which has been hammered with allegations of Russian interference saw the election of a certain Donald Trump as President of the United States. The world in August 2018 is a very different one from the one of September 2014.
What are the currency options for an independent Scotland? It is important to note from the outset that what is the best currency for an independent Scotland is a subjective opinion; each option has costs and benefits and will require trade-offs. The best currency for an independent Scotland then is the one that best meets the macro and microeconomic needs of the people of Scotland as determined by the Scottish government.
Broadly speaking, there are three currency options available: The Euro, Sterling, or an independent Scottish currency. We can dismiss the Euro from the outset since to adopt it requires a nation-state to have an independent currency for some time before adopting the Euro. This leaves us with Sterling or an independent Scottish currency.
Regarding Sterling, there are two routes for an independent Scotland: a formal currency union along the lines proposed by the 2013 Fiscal Commission and Yes Campaign or Sterlingisation (which is what has been proposed by the SGC - despite their insistence that it is not). A currency union with the RUK would mean that Scotland could continue to use Sterling and would have some say in monetary decisions taken by the Bank of England (which would act as the Central Bank for the Sterling area and therefore as lender of last resort). Sterlingisation would mean that Scotland would continue to use Sterling for all monetary matters but would not have any say in the monetary decisions taken by the Bank of England. (A similar situation exists with Ecuador and the US dollar – Ecuador uses the US dollar but they have no say in the monetary decisions of the federal reserve and cannot take certain monetary actions to address the economic needs of their countries). In a future independence referendum, the British government is almost certainly going to reject the proposal for a currency union just like last time. This then just leaves Sterlingisation as our only option for using Sterling.
What would Sterlingisation mean for Scotland? On a microeconomic level it might make things more convenient through reduced transaction costs, elimination of currency risks, increased fiscal transparency, and improved competition through comparison of international prices for the same goods. For those who take pride in spending Sterling or those who engage regularly in cross-border business between Scotland and the RUK, there is some benefit to using Sterling.
So far, so good… or is it? The SGC states that Sterlingisation:
“… Allows the focus of the government, individuals, investors and businesses to be on policy choices for growth and the sustainability of public finances. It also provides certainty and continuity concerning existing arrangements and contracts.”
This would be great if it were true - but it is not. In fact, I would go so far as saying that whilst parts of the SGC are excellent, the section on currency is wrong, outdated and runs the risk of single-handedly losing the next referendum for us. Sure, there are some minor microeconomic gains to be had in the short term, but the report seems to assume that the Scottish and RUK governments would have similar economic goals, similar business cycles, and that the Bank of England will make currency decisions based on how they affect the RUK and Scotland. This is, at best, fantasy economics. At worst, it is independence in name only as we become subservient to the market and the Bank of England.
Allow me to explain. Monetary unions work best so long as the following conditions are met:
1) There is a high degree of intra-regional trade
2) There is a high level of similarity in economic structures (for example, economic shocks and business cycles)
3) High levels of labour mobility
4) There is a high level of fiscal integration
This is currently the case in the UK today. Workers can freely travel and work in Scotland or the rest of the UK whilst most fiscal decisions are made in London for the benefit of the UK as a whole (and until very recently, all fiscal decisions were made in London). There is a high level of trade between Scotland and England in exports to both countries and in goods passing through to be exported to other destinations, whilst historically there have been high levels of similarity in economic structures. Indeed, this is why the Fiscal Commission and the Yes campaign proposed a currency union between Scotland and the rest of the UK in 2014 and, if things were likely to remain the same, this option would still be plausible.
What has changed? In a word, Brexit. When the UK leaves the EU in March 2019 it is only going to be bad news for the economy, and that’s assuming we come out of this mess with a deal. As of June 2018, 46 per cent of the UK’s exports go to the EU with 55 per cent of UK imports coming from EU states. Brexit means there will be a decline in UK-EU trade due to tariffs and custom checks. The full effect of Brexit on the British economy is still in the predictions phase, but I would not be surprised if it were to throw the country into recession in the months afterward, especially in the case of a no-deal Brexit.
Assuming that Scotland is not going to have an independence referendum in the next few months, the next one will take place with both Scotland and the UK outside of the EU. Let us assume for the moment we win that referendum and we pursue Sterlingisation. What this in effect means is that an independent Scotland - which will not have the same level of labour mobility with the RUK, will likely see a small decline in cross-border trade with the RUK (depending on whether a free trade agreement is reached or not during the transition period), probably have separate fiscal bodies and potentially have different macroeconomic aims to the RUK - will have the same measures as it has today to control its economy: very, very little. In the words of Richard Murphy:
“[An independent Scotland] would have absolutely no say over any policy that the Bank of England may wish to adopt with regard to it... In other words, for all practical purposes, the Scottish Government would have no effective control of any of the measures used to control its economy. In fact, it would be worse off than it is now... It’s fair to say that such a Scottish Government would be in office but virtually powerless.”
This is true even if by some miracle the UK government made a success of Brexit – monetary union without fiscal union is asking for trouble as the experience of the Eurozone demonstrates. Despite the reservations of many economists, Europe’s leaders pushed for a single currency which came into circulation on 1st January 2002. While the good times lasted it seemed to work, although with sluggish growth. Yet as is the nature of Capitalism, booms lead to busts and in the aftermath of the Great Recession of 2007-09, the chickens came home to roost. The European Sovereign Debt Crisis (the legacy of which continues to plague the Eurozone today) highlighted the constraints on nation states imposed by a monetary union without fiscal union. Eurozone states could issue debt but the debt they acquired was in Euros - a currency they did not have full control over. This meant that unlike most government bonds, there was no way to guarantee that the government could pay back those debts. Since they could not create money they could not ensure liquidity. This meant that financial markets achieved an unparalled level of power over nation-states and could force them to default on their debts – a scenario largely unheard of in recent economic history. With no way to devalue their currency or change interest rates this left Eurozone states with only one option – austerity. The accompanying rise in populist parties across Europe can trace many of their socio-economic grievances to the Euro – and this is the fate an independent Scotland would face if we accept Sterlingisation.
This leaves us with only one option – an independent Scottish currency. By having the fullest range of economic levers at our disposal, we will be able to tackle the socio-economic problems of inequality, sectarianism and deprivation as well as ensure our businesses and entrepreneurs become more competitive and prosperous at home and abroad. That’s not to say there are not any risks to having an independent currency - we will expose ourselves to currency speculation and costs in currency exchanges for a start. Yet once the transition period from union to independence is complete then so long as we have good governance, a well-structured Scottish Central Bank, along with clear and achievable macroeconomic objectives, we will have the means to deal with the inevitable cycles of booms and busts.
Over the next few weeks, we will have a choice – to choose an independent currency which ensures our political and economic independence from the Union or we can have the sword of Sterlingisation constantly looming over our heads.
Paul Anderson is a fourth-year honours student of International Relations at the University of St Andrews. He is currently the National Treasurer of SNP Students and served as Convenor of St Andrews University Students For Independence (STAUSFI) from 2017-18.