I wrote last night that Alex Salmond’s plan to use the pound come what amy after independence would lead to higher personal credit costs as well as higher national debt costs. According to Danny Alexander it might also compromise Scotland’s EU membership. He has a letter from the former EU Commissioner Oli Rehn who told him that it would “not be possible” for Scotland to join the EU while using someone else’s currency.
Rehn said in a letter sent to Danny today:
As to the question whether ‘sterlingisation’ were compatible with EU membership, the answer is that this would simply not be possible, since that would obviously imply a situation where the candidate country concerned would not have a monetary authority of its own and thus no necessary instruments of the EMU.
This certainly puts more doubt as if there wasn’t enough already on the Yes Campaign’s currency plans. No doubt they will have whole load eminent people lined up in the morning to tell us that it’s all going to be fine and we shouldn’t worry about it, but people aren’t daft. In fact, they will probably say that it strengthens their case for a currency union and surely the nasty UK wouldn’t deny them that, especially when they would have a mandate for it from the referendum. Except that the mandate wouldn’t apply to the rest of the UK.
Danny announced this a little while ago in a speech at Chatham House. He probably showed a little too much glee to be honest. A more thoughtful “look, we did try to investigate to see if it would be possible but regrettably it isn’t” tone might be a little more appropriate. We don’t really need more aggression and dissonance in all of this. People are turning off. The most common reaction of my Facebook friends to last week’s ill-tempered debate between Darling and Salmond was to switch of. A “more in sorrow than anger” approach might keep them listening.
Anyway, here’s what Danny said:
The nationalists say that they will be able to continue using the UK pound even if they become a separate state.Because, even if the rest of the UK doesn’t agree to a currency union, they have said that Scotland would use the pound without a formal agreement…
… this is an arrangement known as “sterlingisation”, which would mean Scotland would not have a central bank to set interest rates or act as a lender of last resort.
This is not only a bonkers idea which flies in the face of any reasonable notion of what independence means and which would impose costs and risks on people and businesses in Scotland…
… it is also incompatible with Scotland’s smooth re-entry into the EU.
I will tell you why.
Today I am publishing an exchange of letters between myself and former European Commissioner Olli Rehn, relating to the issue of Scottish independence.
Until a few weeks ago he was the man at the EU Commission in charge of economic and monetary affairs, including the euro.
He’s very clear on one point.
And I quote: “As to the question whether ‘sterlingisation’ were compatible with EU Membership, the answer is that this would simply not be possible.”
No country has ever joined the EU while using only the currency of another country at the point of accession.
As Rehn says in his letter, in 2008 the then Icelandic Government requested the possibility of unilateral ‘euro-isation’ of thekrona to stabilise its monetary conditions and as a shortcut to EU Membership.
The Commission’s response?
They flatly rejected it as against the Treaty.
This was exactly the same case for Montenegro in 2007 which was required to create its own monetary authority as part of the conditions of the EU.
There is a strong assumption in the EU Treaties that every member state will have its own central bank.
But under sterlingisation Scotland would not have a central bank or control over its monetary policy.
So let’s recap on the facts.
First, there will not be a currency union in the event of a ‘yes’ vote.
That would expose the rest of the UK to risks it couldn’t control, and would leave Scotland without the tools to steer its economy.
“One of Alex Salmond’s 3 Plans Bs is ‘sterlingisation’ – borrowing the pound, but without any access to the support or stability provided by the Bank of England.
Today we learn that that option is incompatible with EU Membership.
So an independent Scotland would face a simple choice – using the pound like Panama uses the dollar, or joining the EU.
It can’t have both. This shows yet again the nationalists failure to put forward a credible currency plan and the dangers it poses to the people of Scotland.
I think that people need to remember at the moment that the most crucial audience is the undecided voter. If you want them to hear your words, you have to get the tone right and talk to them, persuade them.
* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings
Follow @LibDemVoice on Twitter
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
No Hiding Place (1963): The joys of live television drama
Elon Musk becomes even more unpopular with Brits
How to lose weight and keep it lost.
January
Weekly Road Report - West End Ward #dundeewestend
Will Reeves be forced to break her own fiscal rules?
Cassie
Peter Davies
Mohammed Amin
34 Comments
So why could the not create a central bank, start printing the scottish poond and peg it to the pound sterling at the rate of 1:1? I assume that Olli Rehn would not object to that given that Bulgaria, Lithuania and Estonia all have currencies pegged to the Euro and are all EU member states?
I am told that pegging one currency to another, while avoiding a black market situation, requires a central bank to buy and sell foreign currency appropriately to maintain parity. It can be very expensive, or even not possible, if the country doesn’t have enough foreign currency to counteract market pressure to worsen the exchange rate.
I guess this means it can only work if the market broadly agrees to the exchange rate. If it doesn’t, say if the Scottish economy starts performing badly, then the currency markets will create a crisis and either the exchange rate will have to change accordingly, or something else will have to give!
Oh dear Danny! I thought you had begun to switch to a more positive mode. Statements like this read as an act of political hari kari. Whether right or wrong, if the NO vote prevails these kinds of intervention will only be remembered as acts of political arm twisting and subsequent explanations will feel like feeble protestations of ‘I didn’t mean it really’. A YES may well mark the high tide for Scottish Nationalism, but Danny Alexander and other politicians will have to engage in negotiating what might be possible rather than proclaiming impending doom from the sidelines.
It is true that Scottish independence would be uncharted territory for the EU and undoubtedly there would have to be hard decisions about the currency on all sides, but the starting point would have to be a recognition of the political impossibility of excluding Scotland from the EU and in the still unlikely event of a YES, there would be an opportunity for politicians who have it in them to display leadership of vision and constructive imagination.
The point is, no country has ever joined the EU having previously been part of another member state, So that assertion of Alexander’s is meaningless. This could just be a cue for the (rump)UK and Scotland to both join the Euro simultaneously. About time, anyway.
The chances of (rump)UK joining the Euro are zero, there’s no point even going there even if you still believe it is a good idea. I’m starting to think the currency issue isn’t so terrible though. We will see whether Westminster is bluffing otherwise surely Scotland will just set up its own currency – I’m mystified why this has been ruled out so far. If countries far smaller than Scotland can maintain their own currency why can’t they. This would then give them the opportunity to join the EU without too much trouble.
It may cause trouble for the financial industry is Edinburgh, but that will surely be heading south once a currency union is ruled out anyway.
A Scottish currency has been ruled out so far because Salmond recognizes the risks involved. He wants a form of adolescent semi-independence in which Scotland can scream for help from Daddy England if things go wrong.
… or to be more politically correct, Mummy and Daddy rUK.
Paul in Wokingham
That is an option, if the market moves on the ScotPound (either way) then the new Scot Central Bank will have to enter the currency market to stabilize it. If it runs down the foreign currency reserves then the Scottish government would have to borrow to maintain an arbitrary currency value. IF it is selling to keep the currency down you are pumping up the money supply with an impact on inflation.
Either cost is not really worth it, better to let it float and find a new equilibrium.
A situation where a potential member’s currency is governed by another country that is already a member, and therefore already playing by European Union rules, with EMU compliance and all that, is clearly a situation without precedent.
Although it would, yes, be preferable for Scotland to set up its own currency as part of independence, perhaps trading under a transitional guarantee from the Bank of England for a period of time to allow confidence to return, or under that of the ECB if the continuing UK doesn’t want to be involved like that, which would be understandable.
I expect that the European Union would see its way to making arrangements around this situation, as the current sitting Commission has suggested. Juncker is on record as saying that he doesn’t foresee any major obstacles coming up from the European Union’s side of the problem, and that although his Commission isn’t planning on expanding the EU into new territory, the Scotland question is a different matter. The continuing UK would also not be able to throw any obstacles into the path without trashing its diplomatic reputation and creating legal problems for itself along the way.
Danny Alexander’s interventions in this debate are not terribly helpful. I much preferred Tim Farron’s one last week, which made a much more positive contribution than this return to the lectures about what Scotland isn’t allowed.
Richard Dean
“A Scottish currency has been ruled out so far because Salmond recognizes the risks involved. He wants a form of adolescent semi-independence in which Scotland can scream for help from Daddy England if things go wrong.”
And blame when things are not as perfect as he promised.
When tough choices have to be made, it will be “the English” (rather rude to NI and Wales)
Frank Booth
I do consider it useful, if not essential, to continue arguing unfashionable cases, such as the Euro in Britain. Otherwise people will just totally forget / lose interest / think that the argument is more “lost” than it actually is. Yes, of course, there comes a time when it really is pointless, but I think we are a long way from that in the case of the Euro!
+1 to what Martin said. The argument that current EU law or opinion doesn’t allow something is pretty pathetic – the law will just have to be changed then, won’t it – after all the EU is going to be desperate to want Scotland in, on current expansionist form. If the former Eastern Bloc countries are good enough for membership I’m pretty sure Scotland will be.
But more than that, is Mr Alexander seriously offering an argument that is effectively “well the EU won’t like it”? He is working for the NO campaign, right?
Tim13 – you suggested it was the cue for rump UK and Scotland to join the Euro. You’d have to deal with the implacably opposed public opinion first. Even Salmond has ruled out joining the Euro, which doesn’t suggest he sees it as a very promising option for Scotland right now.
Liberals should continue arguing unfashionable causes, whilst not necessarily putting them in the manifesto.
When it comes to Sterlingisation and the EU: I think Scotland would be allowed in, but they might have to pay some big concessions.
I agree with Caron that if you want undecides to hear you then you have to get your tone right, especially at this late stage.
This has the potential to get nasty and I don’t like what I’m seeing. The UK and the EU need to be careful not to look as though they are trying to be imperialistic towards Scotland. Scottish nationalists also need to recognise that nationalism isn’t really liked, especially not in Europe.
Regards
“This could just be a cue for the (rump)UK and Scotland to both join the Euro simultaneously.”
Lol. I rather think not!
Well, re the Euro, of course it makes the most sense as Scotland’s long term currency objective in the event of independence. I expect that any arrangements made for the immediate future will be transitional, not intended to be a long term answer.
As for the rest of Britain, well, at the same time as it becomes apparent that the European Union is building the shared political structures to make the Euro actually work, its becoming increasingly obvious that the UKs exposure to financial market volatility is getting worse, not better. The coalition tries not to mention the rebalancing of the economy away from financial services as that part of the exit from recession has been a total failure. The UK will find itself facing the next downturn or financial market panic quite unprepared, and it may end up being that the Euro becomes the least worst option for the UK government.
Caron is nothing if not tireless in her frequent and sometimes creative promotion oh her unionist cause. It would appear however that 20% of those who still regard themselves as Liberal Democrats in Scotland will vote YES to independence.
The following from Ch4. News provides a reality check to the unionist propaganda —
http://www.channel4.com/news/scottish-independence-referendum-you-gov-poll?msg_id=DM1732&nl_bid=130417565
John, don’t call me a unionist. I’m a federalist.
Yes, some Liberal Democrat members and voters are voting Yes. Most aren’t, though.
Caron
Come off it – the BettervTogether Campaign is not federalist.
It is pure unadulterated unionism.
Which is why the Orange Lodges will be voting NO.
You may not like your new friends but you cannot deny them.
@JohnTilley.
Come off it, John. Whilst the Lodges may well be voting No as well with the majority of Scottish Liberal voters, to say that makes them friends is a leap too far. The same binary decision can be made on a Yes/No issue from two entirely different perspectives.
Both the LibDems and UKIP support PR, but that hardly makes us chums. On Iraq, we were on the same ‘side’ as the Socialist Worker and George Galloway, I don’t see us popping out for lunch with them as much-loved pals.
The Orange Lodge is nothing to do with the Better Together campaign. By the logic of what you are saying, if one horrible group of people decide they agree with you, you should immediately change your position rather than reach the conclusion, as a liberal, that you think is right.
Let’s not have this thread degenerate into a session of throwing rhetorical housebricks through Caron’s metaphorical front window, shall we?
Although I don’t agree with her that voting No offers any route to federalism, it is her sincere belief and she’s allowed to have it. She’s also allowed to post as many stories here about it as she likes, although it would be nice to see the 20% or so of the party who will be voting Yes represented in a piece here to reflect that stance.
This debate shows the procedural weakness in the referendum debate. To win in 2011 Salmond promised a referendum on Independence. It should have been sufficient for the the SNP to win an overall majority in the Scottish parliament for negotiations on an independent Scotland to commence . This would have resulted in a Uk/Scotland Treaty.A referendum could then be held to approve the Treaty. It would have been possible to know exactly what currency, which central bank and how much of the debt would be borne by an independent Scotland. As it is these crucial issues are still open to argument and the people of Scotland are being asked to vote for uncertainty as against an all too certain if uninspiring future in the UK
Had to read this twice, first time I read it as “sterilization plan”!!!! I thought what is that crafty old Salmond up to now.
Danny Alexander’s point is basically this: “Alex Salmond, we are the big lads in this playground, and you’ve just come along and taken our football. If you don’t give it back pronto, we will come after you, and we can promise that we will make your life very unpleasant.”
In the end, rump UK will be bound to let Scotland find some sort of viable solution to its currency, and the EU will be bound to find some way to avoid throwing Scotland out. However, in both cases the big lads have the whip hand, and (as Eddie Sammon says) will probably want to exact big concessions. Things could easily turn very sour indeed.
If “No” wins, it will be a vote based on rational fear of what the big lads could do if Scotland were to get them mad. We cannot take pride in winning on such a basis.
I am English, and my instincts are to preserve unity. However, I also think we all ought to read what George Monbiot says on this:
http://www.theguardian.com/commentisfree/2014/sep/02/scots-independence-england-scotland
England is a dysfunctional, grossly unequal country, in thrall to its financial centre, and run by a remote elite. Why should Scotland opt, given a free choice, to join the UK and become subservient to the City?
There is also a wider point. Labour politicians generally look at the parliamentary arithmetic and favour union because they think rump UK has an inbuilt Tory majority. But, what if Scottish independence had a quite different effect on rump UK politics, as the English regions watched Scotland romping away after breaking free of the disastrous London-centric economy? Couldn’t Scottish independence also prove to be the catalyst for real reform in the rest of the UK?
Has Danny Alexander published the letter he sent to Oli Rehn which prompted this? Been trying to find it, and he promised to publish the entire exchange today, not just the reply.
Thanks!
On Scottish EU membership, it would surely require the consent of all EU members.
The Spanish in particular would be difficult to convince!
But we could wind up with the bizarre situation of Scotland outside the EU desperately trying to get in, while England is inside but with the forces of darkness (UKIP / Daily Mail / Europhobe Tories / Ipswich Town FC) desperately trying to leave the EU.
@JUF: perhaps we’ll have to lend Scotland our membership card, until rUK sees sense!
TJ – Montenegro uses the euro without being in the EU. I know that the EU has discouraged others from doing the same (for good reasons) and certainly will not want that to be precedent. Worth pointing out here that Montenegro has some severe austerity.
I would imagine that joining the euro would need a referendum in Scotland – I have to admit that I have no idea how the euro polls there. I can’t see that Scotland would have too much difficulty joining the EU, although what sort of opt-outs it would want/get are a different matter. Schengen to me looks the really problematic issue, but no one seems to mention that.
As to the wider question of whether an independent Scotland could avoid the corporatist trap…I want to believe.
David, that Monbiot article is terrible, basically accusing no voters of an act of self harm without any real assessment of the risks. Pardon me for not wanting to put my savings in jeopardy.
Fair enough Caron, Monbiot only spends 3 of his 15 paragraphs addressing what he calls “the fears the no campaigners have worked so hard to stoke.” Then again, his other 12 paragraphs cover some rather novel arguments of his own in favour of independence, and one suspects he was horribly biased in favour of saying something that might be considered novel and interesting.
You on the other hand seem to think that risk is the only thing that really matters. Perhaps as an Englishman I have a different perspective on that question, but colonial powers throughout the ages have warned their recalcitrant subjects that they are better off staying as part of empire, that it’s a risky world out there on your own, and that the rulers of empire won’t act nice to those who those who try to leave. If all we’ve got to offer the Scots is threats, we deserve to lose.
JUF:
But we could wind up with the bizarre situation of Scotland outside the EU desperately trying to get in, while England is inside but with the forces of darkness (UKIP / Daily Mail / Europhobe Tories / Ipswich Town FC) desperately trying to leave the EU.
——————————————————————————————————-
I keep thinking of this as well. But I think Scotland will be admitted, and may yet fare better in the EU, than England outside it. At the moment, UK’s EU exit looks very probable, with so many people preoccupied with “our English culture in danger” (our neighbour’s words) from those “Poles”.
Tim: “This could just be a cue for the (rump)UK and Scotland to both join the Euro simultaneously. About time, anyway.”
If this is the consensus view in the party, we can only hope the much-touted Lib Dem electoral meltdown delivers on its promise.