Ruling out currency union: Locking the horse inside the stable?

MoneyThe currency in an independent Scotland has been the subject of much frenetic debate in recent months. The Scottish Government’s White Paper on independence is clear that their preferred option is to continue to use sterling within a monetary union with what would remain of the UK:

The Commission’s analysis shows that it will not only be in Scotland’s interests to retain Sterling but that – post independence – this will also benefit the rest of the UK.

Under such an arrangement, monetary policy will be set according to economic conditions across the Sterling Area with ownership and governance of the Bank of England undertaken on a shareholder basis.

The SNP has this unfortunate habit of thinking that just because it wants something to be the case, that it’ll happen. In any relationship, the views of the other parties have to be taken into consideration. Over the past few months, expert after expert has said that Scotland would have to cede its newly won independence and submit its spending plans to the will of the Bank of England and would have arguably less influence over its fiscal policy than it does at the moment.

Just the other week, the Governor of the Bank of England, Mark Carney, laid out the conditions which would be necessary for a successful currency union:

The euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources. In short, a durable, successful currency union requires some ceding of national sovereignty.

It is likely that similar institutional arrangements would be necessary to support a monetary union between an independent Scotland and the rest of the UK.

But despite all of that sage and expert advice, Alex Salmond told the FT that he has no intention of ceding any power at all over fiscal policy:

Mr Salmond said an independent Scotland would be happy to cede sovereignty on monetary policy but on fiscal policy it would only have to accept aggregate limits to state debt and borrowing.

He added on that the currency union might be the trade for Scotland agreeing to take on a share of UK debts:

In the interview, Mr Salmond refused to consider a “Plan B” on the currency, warning that refusal by the remaining UK to accept shared use of the Bank of England would free Scotland of any responsibility for the UK debt.

“You’ve got a negotiation where the UK government will want to persuade the Scottish representatives that they should take on a share of debt which is the legal liability of Her Majesty’s Treasury,” he said.

 So, you have a Scottish Government doing it’s usual false reassurance and asserting that it’ll all be fine despite growing evidence to the contrary. What should the UK Government do? Well, one option is to stand by while yet more experts demolish the SNP’s arguments. The other significantly riskier option is to take the whole idea of a currency union off the table. This, we are told, is what George Osborne is going to do tomorrow, with the backing of Ed Balls and Danny Alexander.

Why the risk? It makes the UK Government sound reactionary, petulant and unwilling. This could alienate the very people that Better Together needs to vote No in September. These are the people who respond to the Yes pretty picture narrative. They will even say that it doesn’t matter if we’re poor as long as we’re free. However unpretty not having a viable currency would be, Osborne’s gamble runs the risk of sounding like more of the macho posturing we’ve had on both sides of this debate. It’s not a good look. It feeds those who view the Union as some great oppressive tyrant.  But, and it’s a big but, if a currency union just isn’t going to work, is it not better for the UK Government to be honest about it? How would the voters in the rest of the UK feel about sharing its currency with a country that’s just left that union? Would a government of any flavour be able to get that through the House of Commons? I can’t see it. If it’s a political, fiscal and economic non-starter, is it not best to say so now, rather than let Scotland vote yes on the basis of false reassurance. Saying no then would be locking the door after the horse had bolted. I just hope saying no now isn’t locking the poor beast in the stable in the dark for months on end.

Bluntly, Scotland needs the currency union a great deal more than the rest of the UK. Nicola Sturgeon goes on about transaction costs for business. Well, the other UK countries may well be Scotland’s biggest trading partner, but Scotland isn’t the rest of the UK’s, not by a long chalk. You have the 600 million people in the EU and US way ahead of our 6 million people, and nobody’s seriously suggested we join the Euro for a while, or the dollar ever.

Reaction from the SNP so far has been either that the UK Government is bluffing or that it’s bullying. Well, they can’t have that both ways.

I’m still not convinced that this is the best tactic. A lot will depend on what Osborne actually says tomorrow. It’s not the time for rhetoric and passion. If he’s going to set out this stall, his language will have to be rational, reasoned and measured. He’ll have to set it out very carefully and logically, with no rancour. He has a lot of convincing to do, and, let’s face it, he is not the most popular politician as far as Scots are concerned. Already the execution of this has been incredibly cackhanded. If David Cameron had kept his mouth shut at that press briefing yesterday and just let Osborne make his speech on Thursday, we could have had the judgement done on his actual words, not conjecture, for 36 hours before. Cameron did this last year, too. He made some comment about the timing of the referendum not being an issue to journalists before it had been agreed between the Governments.

The SNP must now state their Plan B

One thing that’s absolutely for sure is that the SNP has nowhere to hide now. They’ll try, for a while, to just lob accusations of nasty Westminster bullies into the air but that won’t count for much if, having been told they won’t get their currency union, they don’t produce an alternative.  Otherwise, they will be asking the electorate to play the biggest game of chicken in history. Currency is fundamental to everything we do, so we need to know exactly what’s going to happen. It would have been wrong of the SNP to keep making promises it was in no position to keep on something as important as this. It’s interesting that nobody really cared about the currency a few months ago, but now polls are seeing it figure quite highly.

So, everyone, to the tune of “Donald where’s your troosers”, Alex, where’s your Plan B?

The three pro UK parties are taking a huge risk here. It will be some time before we see if it pays off, but I’d say it has a pretty good chance. That doesn’t mean I have to like it, though.

* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings

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  • Which ever way the referendum goes all I can see is this approach backfiring badly. I do not see why Lib Dems have to be calling ‘me too’ with the other parties. For Danny Alexander in particularly and Scottish Lib Dems, I think the risks are greater than for the others. Is there not an option of trying to find a settlement in the event of a Yes vote?

    I am quite amazed at the scare tactics being employed. An acrimonious divorce would be apalling and an acrimoniously enforced marriage little better.

  • I don’t understand Salmond’s arguments – either you want out and your own independent currency or you don’t. The whole referendum yes campaign is down the pan anyway – it got killed today with Osborne’s statement. Unless of course the Scots really want to put their money where their mouth is.

  • Caron Lindsay Caron Lindsay 12th Feb '14 - 7:29pm

    I see what you’re saying. It needs to be about positively choosing the union, or rejecting independence cos you think it’s a bad idea, not submitting to the union. I’ll vote no regardless but I do have concerns about how this will play. The ball is very much in the SNP’s court now. They have to say what their alternative is. And the trump card may be that now we’re part of one of the strongest currencies in the world. Why give that up?

  • Little Jackie Paper 12th Feb '14 - 7:44pm

    Well…the other option would be for a currency peg, there are plenty of those around the world. Though that might store up pressures in Scotland longer-term. But there are options that could be followed.

    More generally though I do agree that the SNP do seem rather blasé about using Sterling if the vote is YES to independence. Indeed, much of the argument seems to rest on an assumption that the rest of the UK has this great aversion to a proportion (undefined) of debt. If this truly is the trade-off, then I can see a scenario where the remainder of the UK may very well see its interests in taking on the Scot’s ‘share’ of the debt rather than have a currency union. The debt is a one-time hit whereas a currency union without full fiscal (and banking?) union is an ongoing liability that would be out of the rest of the UK’s control for an indeterminate period of time. Take a look at the Eurozone for some idea of the risks there. Salmond says that Scotland would need to recognise that they might, ‘have to accept aggregate limits to state debt and borrowing.’ That might be the case, but without knowing what penalties there are in there that recognition doesn’t really tell us much. It is not at all beyond the bounds of possibility that the UK might see it’s interest in stability, even at the cost of debts.

    I’m no expert on financial markets, and I have no idea whether or not an independent Scotland that repudiated debt would be regarded as in default. But it looks like a risk. It is also worth pointing out that a currency union might arguably need a referendum – certainly for the euro there is a political consensus on the need for a referendum on currency union.

    Either way, if you don’t have a plan for currency post-independence that does not rely on the consent of others then you don’t have a plan. It is that simple.

    I suspect that much of this is just media huff-and-puff and something like the debt allocation that followed the break-up of Yugoslavia is the most likely outcome.

  • Little Jackie Paper 12th Feb '14 - 7:47pm

    Caron Lindsay – ‘And the trump card may be that now we’re part of one of the strongest currencies in the world.’

    You’re not serious?

    In 2003 I went to my wife’s home country and got 91 of the local currency to the pound. Last year I had to haggle them up to 59. Post QE Sterling is a toilet paper currency. Take a look at your energy bills for some idea of the effects of the devaluation of sterling.

  • I guess plan B would be a currency pegged to the pound. I’m not clear exactly what the disadvantage of this is. It’s value would be guaranteed by Scotland not by the UK, but if you don’t want the (rest of the) UK approving your budgets this seems reasonable.

    Plan C would be the Euro, which would at least give an independent Scotland some say over monetary policy. And it is a currency that countries are queuing to join.

  • Peter Davies 12th Feb '14 - 8:04pm

    Presumably his reason for wanting to be in Sterling rather than the Euro is that he doesn’t expect to meet the criteria. The Euro helps strong economies like Germany but not necessary week ones like Greece. Mr Salmond’s preference suggests that he intends to create the latter.

  • Little Jackie Paper 12th Feb '14 - 8:18pm

    Joe Otten – The peg would work short-term, however longer-term you can end up with situations like the UK had with the ERM where setting currency to peg to the Mark proved less than successful. A Scottish Pound might not necessarily have to be pegged to Sterling of course, but any peg would need to be maintained somehow.

    For the Euro, even if Scotland did join the EU (which is most certainly not guaranteed) then they would need to have been meeting the convergence criteria for, as I understand it, at least two years and most probably much longer.

    There are no fast options here. It might well come down to a value judgment on the strength of a SCP – I don’t really have much feel for how it might turn out.

  • If an independent Scotland aspires to EU membership it has to consider when it will adopt the Euro (and join Schengen). That is the issue. As such the 3 main parties ruling out a Sterling currency union is a hollow threat.

    It is up to people in Scotland to consider where they want to be in 20 years time when making their decision.

  • Little Jackie Paper 12th Feb '14 - 10:46pm

    ‘It is up to people in Scotland to consider where they want to be in 20 years time when making their decision.’

    That is, of course entirely true. But I think that the point being made here is that, ‘where they want to be,’ is not the same thing as what is available. There is no reason why a post independence rest of the UK should work in the interests of an Independent Scotland. The responsibility of institutions of the remainder of the UK would be to the citizens of the rest of the UK. I really don’t think that Scotland could declare itself independent of those institutions and then demand that those institutions then work in the Scottish interest on, say, a currency union. There is nothing hollow about it, it is constitutionalism of a sort commonplace around the globe.

    It is the same with the euro. I really don’t see that the EU would waive the convergence criteria for an independent Scotland on the basis that the people of Scotland have decided that’s where they want to be.

    There is, of course, a quite staggering amount of internet bombast on this subject and my sense is that outside of the talkboards pragmatism rules. If Scotland votes yes, then I for one wish them well, if they vote no then I also wish them well. Only as I said earlier, Independence that is based on the assumed consent of others isn’t real independence to my mind.

  • Clearly we can’t stop an Independent Scotland using Sterling but I can’t see why would allow a foreign country to have any say in our monetary policy. Salmond really needs to understand he can’t have Independence without Independence!

  • Is it any wonder we lost so much of our vote in Scotland to the SNP in 2011? From north of the border we must look like just another London based unionist party, albeit one that’s a bit smaller than the other two. I felt pretty sickened by today’s announcement, which I cannot support.
    The Liberal Party I joined had a proud tradition of supporting Home Rule since the time of Gladstone, now we’ve turned unionist by default. OK I accept that Home Rule (or ‘devo max’ to give it its modern title) stops short of full independence.
    Do you really think the Westminster based Salmond haters would even consider devolving more powers if there is a ‘no’ vote in the referendum? Well Liberal Democrats should be arguing for just that, but we’re too busy scaremongering and making threatening noises with our LabCon friends in Better Together.’
    If I had a vote in Scotland I’d be voting ‘yes’ if only as an act of ‘fracking’ against the over-bearing dominance of the Whitehall and Westminster elite in our politics!

  • Hannah Bettsworth 13th Feb '14 - 8:23am

    To have devo max you have to be in the UK! And of course we don’t like Salmond. The SNP are centralising and have authoritarian tendencies, just like Labour and the Tories. If you think the Scottish Lib Dems are not making the case for more powers, I don’t know where you’ve been.

    Essentially what you’re doing there by voting Yes is swapping centralisation in London for centralisation in the Central Belt. We don’t even have separate local police forces anymore.

    And for future reference, the Scottish Lib Dems are a Haymarket based federalist party.

  • “In any relationship, the views of the other parties have to be taken into consideration.”

    So will people in England have a referendum on whether the Scots can continue to send MPs to Westminister after devo-max?

    Good article though. It sounds like Salmond wants Scotland to be independent from the UK, but for England and the others not to be independent from Scotland.

  • I don’t see why we as Liberal Democrats should be the ones to sit by and let Salmond cherry-pick the institutions of the United Kingdom at will. If that means talking tough and spelling out that this process is not in the interests of the rest of the UK, so be it. It is a point that sooner or later would have had to have been made.

    How could Salmond expect to use Sterling unless under a treaty with the UK, which would have to be approved by referendum? And how likely is it that the population of the UK would want to grant him the privilege?

  • RC 13th Feb ’14 – 9:23am

    How revealing that RC uses the term “talking tough” in such tones of approval.
    RC is so tough that he hides behind a screen name, cannot reveal the Clark Kent behind the RC Superman.
    But has he considered that London (or Metropolis) based anonymous commentators talking in macho bullying tones is hardly likely to make the Scots vote NO, if that is what he wants.

    i keep telling my family and friends in Scoland to vote YES, it is their best chance to escape from an Eton dominated elite and to have a democracy without interference from the House of Lords stuffed with rich Londoners who have bought their seat or because they are a bishop in a foreign church.

  • Alex Dingwall 13th Feb '14 - 10:29am

    Sad to see Danny just parroting Osborne and Balls on a currency union with Scotland given that Alistair advised against adopting this very position.

    Newsnight Scotland, 13 November 2013, Alistair Carmichael, Secretary of State for Scotland stated:

    “I tell you particularly why you wouldn’t rule it out…”

    “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…”

    And worth noting a few other views:

    On Newsnight Scotland on 10 January, Alistair Darling said: “Of course – of course it would be desirable to have a currency union . . . If you have independence or separation, of course the currency union is logical”.

    On Newsnight Scotland on 13 December 2012, Willie Rennie was asked whether he thought an independent Scotland should keep the pound, to which he answered: “We will work with our partners in the United Kingdom, who we’ve worked with before.”

    And of course the Dec 2013 Panelbase Poll of voters in England, Wales and Northern Ireland showed clear support for a currency union, (71%) with 81% of Lib Voters in favour.

    So seems voters have a far more common sense approach to this matter.

  • Paul in Twickenham 13th Feb '14 - 10:45am

    It would probably be better for an independent Scotland to introduce its own currency and peg it to sterling in the way that Denmark and Switzerland do with the Euro rather than “poundization” (a la “dollarization” in Ecuador) which involves complete surrender of monetary policy, although I would guess that capital markets would be happier with the relative certainties implied by poundization.

  • Eddie Sammon 13th Feb '14 - 10:51am

    The unionists have got this right. The asset is not the pound, but what all that borrowed money has bought for Scotland. We should offer to help them set up their own currency though.

    However Caron is right to feel nervous – we need expert campaigning and plenty of resources to ensure Scots don’t feel like they are trapped in an English colony.

  • Its pretty much a slam dunk argument for me against independence. The reality of being a new independent country really hits home when people realise an independent country means an independent new currency.

    I don’t see it as a ‘strategy’ by the other parties either. If Scotland wants to be independent I don’t see why the rest of the UK should take on the risk and hassle of a currency union between two separate nations.

  • @ John Tilley

    I’m happy if the Scots vote Yes if that is what they really want. But they must do so knowing that they will not get everything that they want or even most of it.

    As for this being a “London” or “Etonian” thing, do you really think the rest of the country wants to grant Scotland the free use of the pound? I think not.

    You comment on my use of initials. Plenty of people do the same here or use pseudonyms or partial names (Martin, John, Little Jackie Paper, Paul in Twickenham. g, Mack (not a Lib Dem) and on and on.

    Why is it suddenly unacceptable in your eyes. Or is it just you disagree with me and are looking for a chance to make ad hominem attacks?

  • Why have the Better Together folks not set up a website where non-Scottish UK citizens can sign up to a statement saying something along the lines of, “it’s entirely up to you and we won’t stop you leaving; no doubt you could manage on your own as you are resourceful folk, but we’re sure you and we would both be better off sticking together; and as much as we dislike Alex Salmond and want to beat you at football, we would genuinely much rather you stayed, so please vote to keep the union”?

  • What Salmond et al seem to want is not independence as such but what might, by analogy with Devo-max, be called “Indy-min” because without a separate currency that’s what it would be. Even if a future independent Scotland was represented on the Board of the BoE that would only be a fig leaf giving no power to influence policy against the large majority. I can only surmise that the reason the SNP want Indy-min is because their private polling (and presumably also that of the other parties) tells them that Scots want to keep the pound.

    On its merits it’s mad to use someone else’s currency – look how well it’s turned out in the Eurozone for instance. It’s horse feathers to claim as per Carney quote above that: “The euro area is now beginning to rectify its institutional shortcomings … “”. Salmond must know this so this is all politics pure and simple .

  • David Allen 13th Feb '14 - 1:00pm

    The decision to rule out a currency union is, quite simply, the only decision that is technically sensible and correct. Forming a currency union could do us all a lot of harm. For the same reason, the Euro does not work, and the “eurozone” should be planning a a managed retreat from it.

    How do we prove that we are not just trying to stuff the SNP, we are doing what must be done? Well, the Better Together campaign ought to acknowledge that this must be an unwelcome wobbler to the SNP, and that the No campaign ought not to be playing it tactically to stuff the Scots. So, they should offer Salmond time and resources to work up a viable Plan B, and offer him the option of postponing the referendum if he wants it. If nobody else makes such proposals, the Lib Dems could do so.

    It is very important this does not come across, whether rightly or otherwise, as England playing dirty tricks against the SNP. If that is what gains credence in Scotland, then the vote will be a resounding Yes.

  • Salmond has his plan B – have an independent currency and reject the Scottish share of the national debt.

    This is quite canny (dishonest and selfish, but canny), as he can portray it as the English trying to foist an unfair debt on Scotland. Essentially he’s asked for somethign unreasonable, and then when he doesn’t get it he’s demanding something else unreasonable.

  • I think it is absolutely right for the realities about currency to b e spelt out. I suspect the great majority of those Scots who are offended by that are already in the “Yes” camp. Those who have yet to make up their minds are likely to want clarity as to the real consequences of leaving the UK.

    However, positive initiatives from Westminster are also needed. Whatever the technical arguments against it I think it is essential for a clear indication to be given to Scots well before referendum polling day as to what extensions in the powers of the Scottish Parliament are likely to be on offer in the event of their deciding to remain in the UK. If Scottish people can see that the evident success of devolution can be further built upon while still retaining the benefits of UK membership they are more likely to take this option. If I was a Scot that would unquestionably be what I would want.

  • RC 13th Feb ’14 – 11:09am

    In reply to your question, no it is not just you. I have often objected to the use of screen names by others. I think it undermines your case as a matter of fact. It also limits understanding. When you know a little about someone, where they are coming from, it helps to comprehend what they are saying. For example much as I often disagree with Simon Shaw, at least I know he is a real person, a member of the party, an elected councillor, and that he lives in a ward surrounded by golf courses. All of that helps me understand a bit about him and the views he is expressing. For all I know, RC stands for Random Conservative and It reduces your contribution and the value of your comments that you chose to hide behind this screen person.

    The moderators say there is nothing theycan do about it. I have to accept that. But I still object to it. I hope I can convince you and others that the world will be a better pace if you come out and admit who ou are.

  • Steve Deller 13th Feb '14 - 7:34pm

    It’s about time English MP’s started standing up for England. This is a welcome, if belated, start. Now we need an announcement on removing Scotland from the UK election of 2015 if there is ayes vote. The remaining UK will need to be clear on that to avoid the possibility of the uncertainity of a nine month government should Labour win with a majority of less than 40.

  • jedibeeftrix 13th Feb ’14 – 8:12pm

    A link to your website does not really tell me about you, it tells me bout your fantasy world. What it tells me about you is that you prefer tyle over substanc. It also tells me that you probably have little sympathy or the visually impaired. You mght want to see the RNIB guidance on readability and the use of fonts and colour.

    The visual impact of your website gives a different impression from the contents of your comments in LDV. In LDV you come across as. a bit of a far right twerp, who quotes the Telegraph, the Tea Party and Quiintin Hogg. This might be an entirely invented persona. For all I know you are Mark Pack having a laugh. Whoever you are, your screen name and website do not aid anyone in knowing what you mean or what point you are trying to make.

    As for unknown people who post in LDV, mot of them are unknown to me, but I have noticed that they tend to be more polite. I think that is my main objection to screen names. They allow people to be more aggressive and impolite because they are hiding behind a mask. As a Liberal I believe in people being open and honest and accountable for their actions.

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