Will an independent Scotland be able to sustain a new currency?
The pound has taken centre stage as it emerged as a key battleground in the debate over Scottish independence. Voters north of the border will be given the chance to opt to leave the United Kingdom in September 2014 in what has been billed as ‘one of the most important decisions in the history’ of these islands.
The referendum not only threatens the Union after more than 300 years, but also raises questions over what currency an independent Scotland would use.
Alex Salmond, leader of the Scottish National Party, has set out plans to retain the pound and create a ‘sterling zone’ with the remainder of the UK if the country becomes independent.
But George Osborne warned on Tueday it was unlikely that England, Wales and Northern Ireland would agree to such an arrangement if Scotland decides to leave.
‘It is a decision for two governments – not just the newly independent Scotland but also the rest of the UK,’ said the Chancellor. ‘It is unlikely that the rest of the UK would agree to or make work a euro-style currency zone with Scotland, so if Scotland wants to keep the pound, it should stay in the UK.’
His comments came as the Treasury published a report on the currency choices facing an independent Scotland. The decision goes wider than the choice of notes and coins in circulation.
It also involves who sets interest rates, levels of tax and spending, and whether the Bank of England could act as ‘lender of last resort’ for Scottish banks and financial institutions. The Treasury analysis, presented by Osborne and chief secretary to the Treasury Danny Alexander, outlined four options for an independent Scotland.
Scotland could, it argued:
÷Continue to use sterling with a formal agreement with the UK, creating a eurozone-style zone;
÷Continue to use the UK pound with no formal agreement, just as Panama uses the US dollar and Montenegro the euro;
÷Join the euro, a policy the SNP once advocated but has shied away from amid the crisis in the 17-nation single currency bloc;
÷Introduce a Scottish currency.
Speaking alongside Alexander in Glasgow, Osborne said: ‘The analysis is clear. All of these alternative currency arrangements are less suitable economically than what we have now – for both Scotland and the rest of the UK.’
The Treasury report said a formal currency union ‘would only be possible if both an independent Scotland and the UK could reach an agreement that satisfied both countries’ economic interests’ – something Osborne said was unlikely.
The Chancellor suggested any currency union could result in Holyrood having to submit budget plans to Westminster for ‘rigorous oversight’ and approval.
Scotland would also have no control over interest rates set by the Bank of England – whether it kept the pound with or without the consent of the rest of the UK.
And there would be questions over whether the Bank of England could act as ‘lender of last resort’ to Scottish banks – undermining the safety of the financial system north of the border.
‘Even if both a separate Scotland and the rest of the UK could agree a deal to create a eurozone-style currency union, we would be giving up control of our taxes, our budget and our interest rates to what would then be a foreign country,’ said former Labour chancellor Alistair Darling, head of the No campaign.
The SNP was for a long time in favour of joining the euro on independence – a policy which has been abandoned after the crisis in the single currency bloc erupted. Scotland would need to negotiate an opt-out with Brussels, just as the UK and Denmark have done, given European Union rules stating that all members must adopt the euro in future.
A Scottish currency would not require any deal with the UK. But while such an option looks attractive, it could lead to an exodus of money as Scots opted to hold their assets in safe and established currencies.
Volatility in the exchange rate could also spook investors and the financial markets.
The Treasury report highlighted a number of currency arrangements which have failed in recent years – including the UK’s exit from the Exchange Rate Mechanism in 1992 and the break-up of the Czechoslovakian monetary union in 1993 after only 33 days.
Osborne said: ‘The conclusion is clear – the pound we share works well. The saying goes “If it ain’t broke, why fix it?” but I say “If it ain’t broke, don’t break it”.’
Salmond accused the Treasury of ‘sabre-rattling’, and claimed if there was a ‘resounding’ vote for independence the Chancellor would ‘sing an entirely different tune’. But after yesterday’s skirmishes in Glasgow, it looks like a very big ‘if’.
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