Lib Dem chief secretary to the treasury, Danny Alexander, released the following statement commenting on the Treasury’s analysis of a proposed currency union were Scotland to vote for independence:
Today the Treasury has published further analysis of the SNP’s proposed currency union in the event of Scotland voting for separation.
This analysis is crystal clear – a currency union would create unacceptable risks both for Scotland and the rest of the United Kingdom.
For Scotland separation would already be the riskiest and most uncertain step our country has ever taken. To take that step and then give up control over interest rates, exchange rates, and freedom over tax and spending policy would leave an independent Scotland hugely exposed to economic shocks but without any of the economic levers to manage a response.
All of the currency options for an independent Scotland are riskier than the current arrangements, but a currency union carries particular risks, especially when the SNP says it might only be a temporary arrangement, leaving it at huge risks from market speculation.
A currency union would leave the rest of the UK highly exposed to fiscal and financial risks from a separate Scotland.
As a Scot and as Liberal Democrat Chief Secretary to the UK Treasury, on the basis of this analysis, I couldn’t recommend a currency union to the people of Scotland and my party couldn’t agree to such a proposition for the rest of the UK.
The SNP continue to pretend that an independent Scotland could continue to share the pound. It couldn’t, without agreement. And because a currency wouldn’t work for anyone, it simply isn’t going to happen. The SNP now need to work out what their alternative currency proposal is and set it out openly.
This isn’t bluff, or bullying, it’s a statement of fact. The SNP’s claims that an independent Scotland could or should be able to share the pound are pure fiction. When we vote in September, no one in Scotland should vote for independence in the belief that we could keep the pound.
A strong, stable, growing Scottish economy is best served by keeping the United Kingdom together. That is the only way for Scotland to keep the pound.
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34 Comments
The fact is that neither Osborne nor Danny have the power to prevent Scotland from using the £ as its currency – the £ is a fully tradable currency. What is proposed by the Scottish Government is a formal currency union with shared input into monetary policy, cooperative financial supervision, and agreed fiscal rules.
Nobel Prize winning economist Sir James Mirrlees has underlined that a shared sterling area would be in the interests of not just an independent Scotland, but also the rest of the UK.
“A continuation of sterling in its present area, which would be a benefit for all parts of the UK, is surely the most logical option.”
Sir James Mirrlees – who was part of the Fiscal Commission that examined currency options for an independent Scotland – also made clear that “the need for partners in a monetary union to share some sovereignty in common institutions is no disadvantage if monetary policy is then well conceived.”
The sensible position for Danny would have been to set out the challenges that would have to be resolved in any negotiations. Its worth noting that Osborne refused to provide any information to journalists on the impact on the rUK economy or business if a monetary union was rejected.
Its also disappointing that Danny has fallen in behind Osborne because the party has not considered or debated the issue, and if there is a Yes vote, I would hope that Lib Dems on both sides of the border would work pragmatically in the best interests of both nations.
Stop trying to bully the Scots. It won’t work. They’ll go on using the pound if they want to and London will have to live with it. If they’ve got any sense they’ll join the euro as soon as they can and get away from the UK’s endless incompetent tinkering (pardon me ‘fine tuning’) with the currency.
I do not understand why there even seems to be discussion about an independent Scotland using the pound.
All parties likely to take power in an independent Scotland have said their policy is to join the EU.
Countries joining the EU are required to adopt the Euro within a reasonable timeframe.
Therefore an independent Scotland must use the Euro as its currency.
An independent Scotland simply does not even have the option of using the pound, and also joining the EU.
It’s not Westminster stopping Scotland form using the pound, it’s their own policy of EU membership.
The Euro crisis has shown very clearly the dangers of monetary unions, and how small nations can easily destabilise large currencies. Now is exactly the *wrong* time to be setting up a new monetary union – the financial markets would react very badly to it. There is absolutely *no* interest in the remaining UK signing up to be the lender of last resort to Scotland, and underwriting the currency liabilities that entails.
If Scotland wants to create a Scottish pound and peg it to the UK pound they are entitled to and that is fine as it wont load the UK with liabilities – but it is explicitly not the currency union that the SNP are proposing. I am glad that Danny Alexander is taking this line. I am entirely ambivalent about Scottish independence – I really dont care. But absolutely will not allow my taxes to be used to insure against financial losses of another independent country that has just rejected being a part of my country.
If Scotland wants to create a Scottish pound and peg it to the UK pound they are entitled to
Not if they want to join the EU, they aren’t (except perhaps as an interim measure for a few years while they get ready to join the Euro).
If they want to join the EU they have to join the Euro. There is no wiggle room. Why on Earth is there is debate over something where there is no option?
@Alex Scotland is free to use the pound, but that would simply mean they have no formal arrangement for this. It would be much worse for Scotland to unilaterally use the pound.
As has been said earlier, Scotland’s best route is to join the Euro. Don’t think they will be able to get out of that if they wish to remain in the EU.
The fact is Scottish independence, whatever isde you take on it, is fraught with uncertainty for both Scotland and the rest of the UK.
Dr Daniel Kenealy, of Edinburgh University, and an expert in international relations and law has dismissed the No campaign’s assertion that joining the euro would be a condition of EU membership for an independent Scotland as ‘a genuine example of scaremongering’. “The notion that Scotland could be forced or compelled to adopt the euro is simply untrue.”
Stephen Noon a long-standing policy official at the SNP and qualified EU lawyer, argues that in fact the treaties of the EU state that Scotland would not have to join the euro.
“In order to join the euro, a Member State has to satisfy certain criteria, including currency convergence as part of the European Exchange Rate Mechanism (ERM II).
So what are the rules for participation in ERM II? These are set out in the 16 June 1997 Resolution of the European Council establishing the Exchange Rate Mechanism and the 16th March 2006 agreement between the European Central Bank and the national central banks of the Member States outside the euro area. These make clear “participation in ERM II is voluntary for the non-euro area Member States”.
So, in summary, the Treaties make clear that a Member State can’t join the euro without demonstrating currency convergence as part of ERM II “for at least two years” and because Scotland (or any other Member State, old or new) can choose whether or not to join ERM II, it can’t be forced to join the euro. There is a point of decision – whether or not to join the Exchange Rate Mechanism – which is Scotland’s to take, and if we don’t join ERM II, we won’t be joining the euro.”
But arguments for joining Euro are not solely constitutional. Scotland, at least at first, would probably to better being part of a currency union than not, for fear of capital flight. A pound sterling union would have to be a two way street, but Scotland could proceed to unilaterally use the pound. But that would not be as stable an arrangement and I think the chance of money draining out of Scotland would remain. Therefore, joining the Euro gives the backstop the Scots need to protect their new stand-alone economy.
I’m glad this has now been clarified. A successful currency union between an independent Scotland and the remaining UK would require far more ceding of sovereignty by Scotland than Alex Salmond has said he would be willing to cede. There’s no other way it would be remotely acceptable to the remainder of the UK because as the Euro crisis has shown you need more than a formal framework – you need measures of enforcement too. It was always a fiction that this could be acceptable to both.
For the people of Scotland, it’s only right that they don’t go into the referendum under a false illusion. For the people of the remainder of the UK, it’s right that our party and others have stated their policy on what they would do if Scotland voted Yes.
The notion that Scotland could be forced or compelled to adopt the euro is simply untrue
But:
‘New Member States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro in due course after accession’
http://ec.europa.eu/enlargement/policy/conditions-membership/chapters-of-the-acquis/index_en.htm (Chapter 17)
Therefore Scotland, as a new Member state, would be committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro in due course after accession.
I don’t see any room for doubt there. New member states are expected to join ERM II and demonstrate currency convergence ‘in due course’, and if Scotland doesn’t commit to doing this it will simply not be allowed to join the EU.
How is that not the case?
@Roy: “The most recent accession treaty (for countries such as the Czech Republic, Hungary, Slovenia and Poland) contains the following provision: “Each of the new Member States shall participate in Economic and Monetary Union from the date of accession as a Member State with a derogation within the meaning of Article 122 of the EC Treaty”
Article 122 of the EC Treaty has now been replaced by Articles 139 and 140 of the Treaty on the Functioning of the European Union (TFEU). If you stop at this point, the argument seems won – all new members “shall participate” in the single currency. However, there is another step. We need, also, to look at what Articles 139 and 140 TFEU actually say.
These articles apply to all Member States without a euro opt out, whether old or new, whether accession or not. Article 139 TFEU sets out that “Member States with a derogation” do not participate in the single currency or monetary union. Article 140 TFEU then makes clear that euro membership is not automatic. In order to join the euro, a Member State has to satisfy certain criteria, including currency convergence as part of the European Exchange Rate Mechanism (ERM II).”
But Euro aside – here is a question that we in the Liberal Democrats have to face. The position adopted by Osborne and Danny would mean hundreds of millions for rUK business in currency transaction costs given England exports around about £60bn’s worth of goods into Scotland every year. It would also mean the rUK losing the benefit of North Sea oil and gas exports blowing a hole in the rUK balance of payments, and increasing the trade deficit . And surprisingly the position ignores that all the debt accrued up to the point of independence belongs legally to the UK Treasury, as they confirmed last month. Scotland can’t default on debt that’s not legally theirs. As much as markets might penalise Scotland for not sharing some of that debt, those markets may equally punish rUK for having to accept the debt in its entirety.
I remain of the view that Alistair Carmichael was right: “I don’t think that it would be sensible for George Osborne, Danny Alexander, Ed Balls or anybody else to be one hundred per cent categoric [sic] about [currency]…” “…the responsible thing for politicians to say is…it is highly unlikely…”
As for how this is playing in Scotland, well here is the Herald’s Iain MacWhirter :
http://www.heraldscotland.com/comment/columnists/osbornes-politics-of-dirty-harry-on-currency-union.23407532
Alex Dingwall is correct to say that an Independent Scotland would not be expected to join The Euro right away but they would be expected to apply to join. Long-term monetary union with an Independent Scotland would require The UK to also join The Euro.
Article 140 TFEU then makes clear that euro membership is not automatic. In order to join the euro, a Member State has to satisfy certain criteria, including currency convergence as part of the European Exchange Rate Mechanism
That’s not the issue though. Of course membership of the Euro is not automatic and depends on meeting the convergence criteria (unless you’re Greece, obviously). However, countries applying to join the EU are expected to demonstrate that they are committed to meeting the convergence criteria, are they not?
They can’t join while saying, ‘We have no intention to join the Euro’.
In order to be accepted for EU membership, Scotland would have to commit to making good-faith efforts to join ERM II and meet the test for convergence so that it could in due course adopt the Euro: true or false?
True.
I just can’t grasp, how an independent Scotland could be allowed to use the pound.?
As an example :
Post independence, what is to stop the Bank of Scotland, (unfettered by the Treasury or BoE), increasing its savings rates by (say) 1.5% greater than English savings institutions? This would re-create the Icesave effect, that collapsed spectacularly, in 2007.
So even though the BoE and the treasury would not (technically!), have to come to the rescue of an independent Scottish financial system, they would instead, have to fill the financial gaps for money leaving the likes of the Nationwide, and TSB, as ‘English’ savings money moved north, into the uncontrolled Scottish system, enticed by higher rates.
It would create an almost identical fiasco to the Icesave debacle? How could that be allowed? How could the Treasury be expected to cover the first £85,000 of ‘English’ savings parked in an unfettered ‘Scottish’ bank? Utter madness.
It would create an almost identical fiasco to the Icesave debacle?
It would.
How could that be allowed
The relevant question is, how could it be stopped? If Scotland were to simply declare that it was to use Sterling, without a currency union or a lender of last resort, then there’s nothing the UK could really do to stop it.
On the other hand, Scotland could not do that and join the EU, for two reasons: one being the requirement for countries joining the EU to prove their commitment to joining the Euro, as discussed above; the other being that the EU would never allow a country without a central bank inside, due to the risk of its financial institutions going bust and then having to be rescued by the other member states.
How disappointing that the case for the Union has descended already to blatant bullying. How even more disappointing that the Lib Dems are joining in. Whatever happened to supporting the right to self determination of small nations – or was that in the preamble to the constitution of another party I used to work for? Anyway the bullying is the best way to get the Scots to leave the union!
Surely the Scots will be making an emotional decision – NOT a short-term financial one, based on the fiscal machinations of the ‘old enemy’ down in Westminster and the City of London.
Why are the English politicians and financiers wanting the Scots to say ‘NO’.
Only one reason I can think of – they like the grandiose idea of ‘Great Britain’, but not the idea of being the first leaders since Henry V/VI to lose part of the Kingdom.
David Cameron, Prime Minister of ‘Little Britain’ does have a certain ironic ring about it.
@Roy “participation in ERM II is voluntary for the non-euro area Member States”.
And how has Osborne, Danny ‘s statement been viewed on the international stage: “It was a threat in French, a threat in German and a threat in Spanish.”
“So what would happen if Scotland kept the pound despite London’s refusal?” asked France’s La Tribune. “Edinburgh,” it concluded, “could declare the British currency as the only legal tender in Scotland.” And London, it added, could do nothing about it.
http://www.heraldscotland.com/comment/bloggers/as-others-see-us-world-press-on-osborne-s-currency-gambit.1392301333
participation in ERM II is voluntary for the non-euro area Member States
Yes, for existing non-euro area member states. But becoming a new member state, as Scotland would be doing, is conditional on a commitment to participate in ERM II and proceed in due course to adopting the Euro, is it not?
You seem to keep pointing out that adopting the Euro is voluntary for members of the EU club. Which is true, but irrelevant. An independent Scotland will not be a member of the EU club, but will be applying to join it, just like Serbia, Montenegro, Turkey, Iceland and Macedonia, and all of them have been required to commit to joining the Euro. Why would the rules be changed for Scotland?
The relevant point is that is committing to join the Euro not optional, but is required, in order to join the club.
@ Roy
“The relevant question is, how could it be stopped?”
There would, surely, have to be capital controls between the UK and Scotland? And as a bare minimum, savers would have to be warned that the savings protection scheme, does not apply to Scottish banks.?
johnmc asks :
“Whatever happened to supporting the right to self determination of small nations?”
No-one here is denying Scotland it’s right to self determination. If that is what Scotland wants, then go for it, with warm wishes for your future. What is at odds, is that the rest of the UK does not wish to be the underwriters of Scottish finances.
This is not dissimilar to a teenager that takes on some or other loan, but gets Daddy to be the guarantor.? If Scotland wants to be ‘the adult’, then go for it, but stop dithering and BE AN ADULT, and cut the financial apron strings.?
There would, surely, have to be capital controls between the UK and Scotland? And as a bare minimum, savers would have to be warned that the savings protection scheme, does not apply to Scottish banks.?
Of course. But neither of those would stop Scotland from using the pound, would they?
I mean, Scotland could be punished for using the pound. The UK could block Scotland’s entry to the EU indefinitely, for example.
But it couldn’t be stopped.
@Johnmc
How is it bullying to say that if Scotland votes for independence, the remaining UK would not financially support that independent Scotland going forward? It seems entirely reasonable to me – what other country would be willing to underwrite a foreign country’s debts, be their lender of last resort? There’s no question of denying the right of self-determination. It will only be Scottish voters deciding if Scotland becomes independent – and the rest of the UK will honour whatever they decide. But there are consequences to their decision and the SNP are taking Scots for fools to pretend otherwise.
“You seem to keep pointing out that adopting the Euro is voluntary for members of the EU club. Which is true, but irrelevant. An independent Scotland will not be a member of the EU club, but will be applying to join it, just like Serbia, Montenegro, Turkey, Iceland and Macedonia, and all of them have been required to commit to joining the Euro.”
The poison of ever-closer-union.
Can we please formalise a europe of variable geometries, so that small nations are forced into surrendering sovereignty just to join the club?
Whatever happened to supporting the right to self determination of small nations
If it’s self-determination that’s the issue, why would the Scots even want to join a currency union? What would have been the point of voting for independence, if they’re just going to surrender all their hard-won sovereignty?
I mean, the SNP’s preferred line of attack now seems to be, ‘Vote YES if you don’t want cuts to be imposed on Scotland by a government in Westminster that Scots didn’t vote for.’
But if there’s one thing we know about currency unions, it’s that they allow cuts to be imposed on small nations by the governments of larger nations that they didn’t vote for. Spain, for example, has had cuts imposed on it by a government in Berlin that it didn’t vote for.
So joining a currency union with the UK would actually give Scots even less say than they have at the moment — at the moment, there are Scottish MPs in the Westminster parliament. In a post-independence currency union, cuts could be imposed upon Scotland by a government in Westminster than contains no Scottish MPs at all!
The only way for Scotland to actually retain self-determination is not to join a currency union, but to have its own currency.
“But if there’s one thing we know about currency unions, it’s that they allow cuts to be imposed on small nations by the governments of larger nations that they didn’t vote for. Spain, for example, has had cuts imposed on it by a government in Berlin that it didn’t vote for.”
This comment is nonsense. It is up to Spain and every other member state of the EU to match their income to their spending. Spain has no right to spend monies they don’t have and expect others to fund it. No one is “imposing cuts” if they won’t fund unrealistic levels of expenditure.
“Can we please formalise a europe of variable geometries, so that small nations are forced into surrendering sovereignty just to join the club?”
No. No one is forcing anyone to be, much less become, a member state of the EU.
If a prospective member state has a problem with the rules of the club, they are free not to join.
What organisation operates on the basis that they’ll rip up their organisation constitution just because some non-member wants them to? Would anyone expect the Communist party to abandon communism were David Cameron to apply for membership of it tomorrow because he found the commitment to Communism objectionable?
It is up to Spain and every other member state of the EU to match their income to their spending
No country matches its income to its spending.
No one is “imposing cuts” if they won’t fund unrealistic levels of expenditure.
Were Spain not in a currency union, it could fund its expenditure by, for example, borrowing, then devaluing its currency to effectively write off the debts, then repeating the cycle.
It worked for Italy for decades.
Being in a currency union means that it instead has to submit its budgets for approval to a foreign government: exactly the thing the Scottish nationalists say they object to.
This is what confuses me. The Scottish nationalists object to Westminster controlling their spending. But we have seen, in the Eurozone, how currency unions must end up: with the weaker economies having to submit their budgets to the stronger nations for approval.
So why, if they object to Westminster controlling their budget, would the nationalists sign up to a currency union with the rest of the UK when, as we have seen, such an arrangement would inevitably end up with them having to submit their budget for approval to the parliament in Westminster, just as Athens now has to submit its budgets to Berlin for approval?
It just seems illogical. Why go to such effort to gain sovereignty, only to then immediately place oneself in a position of even less sovereignty than before?
@ Paul R – “No. No one is forcing anyone to be, much less become, a member state of the EU. If a prospective member state has a problem with the rules of the club, they are free not to join.”
I was thinking of our position.
The EU is changing around us, with the eurozone taking many of the fiscal competences assumed by states heretofore, with the threat that brings to britain should caucaused voting be used on matters normally the preserve of the nation state. Against our will.
Actually I don’t – and never have – lived in Scotland. I do though believe in liberal principles and also don’t accept that the pound sterling – the currency of the union – somehow should remain the property of one of the parties only because it is much bigger and, clearly, much less open to progressive change than the other.
I […] don’t accept that the pound sterling – the currency of the union – somehow should remain the property of one of the parties
I don’t think you understand how currency works.
The ‘pound Sterling’ isn’t a think that can be the ‘property’ of any one nation.
The Bank of England doesn’t have any ‘property rights’ over the pound Sterling. If Scotland were to issue its own currency after independence, backed by its own central bank, it would have just as much right to claim that that was the ‘real’ pound Sterling as the Bank of England.
Of course, the international markets would quickly decide that they would trust the currency issued by the central bank with several centuries’s worth of history, in the economy an order of magnitude bigger, rather more than the Scottish one.
But that’s nothing to do with the Bank of England having any kind of ‘ownership’ of the currency, it’s just a rational decision on the part of the markets of which economy they trust more.
Talking about currencies as if they are ‘properties’ that can be ‘owned’ is just… so disconnected with the real world that it’s hard to know where to begin.
Actually, that’s a god point to get clear: this debate isn’t about currency. It’s about who, ultimately, is to be responsible for bailing out the Scottish economy in the event that it all goes tits-up, 2008-style.
A currency union means that that responsibility would ultimately rest with the Bank of England.
That is the point at issue.
Not what colour of notes Scots use to pay for things in shops. That may seem like the totemic issue but really, economically, it’s just window-dressing.
The question the ‘Yes’ campaign have to answer is not, ‘Whose face will be on the notes?’, it’s ‘Who will be lender of last resort, to keep Scottish banks afloat?’
Are the Lib Dems not in favour of the Euro? Or is that another policy you have ditched?