Tuesday, June 4, 2013

British Pound And An Independant Scotland

An event in the not to distant future that may effect the British currency is when voters in Scotland will be given the choice of opting for independence in a referendum in September 2014. This is something much of the world has yet to weigh in on. A separate Scotland has three options, unilaterally keeping the pound, creating a Scottish currency or joining the euro. All of these alternative currency arrangements depend on the rest of the UK agreeing to the union and terms, an independent Scottish state might have to accept "significant policy constraints" under such a pact.Many reasons exist for maintaining a "Sterling Zone," The Scottish government said a currency union would be in everyone's interests economically and benefit both Scotland and the rest of the UK, but the 58 million citizens of the UK will be in no hurry to give away any of their sovereignty over monetary and potentially other economic policy to five million people in another state.

Sterling is a fully convertible currency, this means that if any country in the world wants to use sterling it can.  Examples of a fully convertible currency being used by other nations include Panama and El Salvador using the US dollar. Using the pound for a period, is a well proven route for countries leaving British rule (New Zealand/Ireland/Australia etc). However Scotland’s right to use sterling is stronger than other countries due to the fact that Scotland owns a population percentage share of the Bank of England (BOE), and so we will just be using a currency and services of a bank that we part-own with the other UK countries.  So all that is being proposed is that Scotland will maintain the currency union that was formed hundreds of years ago and still works while leaving the political one that doesn’t.

The question remains whether a newly independent Scottish state is prepared to accept significant limits on its economic sovereignty. This could mean that the Westminster government would have more control over Holyrood than Germany has over its euro-zone partners. This is based on England, Wales and Northern Ireland accounting for roughly 90% of the proposed sterling zone monetary union, whereas the German economy makes up 30% of the 17-member euro-zone. The fear is that the rest of the UK, as the larger economy, would be much more exposed to the risk of an independent Scotland running into fiscal and financial difficulties. Abandoning current arrangements would represent a deep venture into uncharted waters.

Scottish Finance Secretary John Swinney said such a system would let an independent Scotland "use the vital tax and other economic powers of independence to create jobs, grow the economy and build a fairer country". Many people think that Westminster would want to have a currency union because more than £45bn of goods and services are sold to Scottish customers, and oil and gas from Scottish waters would contribute billions of pounds to the sterling zone's balance of payments. "What the Treasury's paper is designed to do is to make things sound as difficult and obstructive as possible and I don't really think it is a helpful contribution to the debate.Swinney said "The chancellor is arguing in his paper that the UK would be the successor state, that it would hold on to the pound and we somehow could not get access to that."

 The Scottish are saying that Sterling and the BOE are part Scottish owned even after independence. If Scotland gets no assets then why should it pay the debt, this includes the recent cost of bailing out two Scottish banks. Should the current UK debt be borne entirely by England, Wales, and Northern Ireland? The currency Scotland decides to use matters to the people, they want to know their coins, notes, savings and investments are securely backed. The choice of the pound, the euro or a new Scottish currency is of fundamental importance to the debate on Scottish independence. There is, amid this, some disagreement over who owns the pound sterling, and the Bank of England. The Scottish government says Scotland can expect to share such institutions, post-independence, having spent 300 years building them up within the UK. But the UK Government takes the view that if Scotland votes to leave the UK, it can't expect to make demands of the UK's institutions.

For Scotland it makes sense not to put a currency barrier in way of trade. Keeping the Bank of England, and the pound sterling, still gives them the choice to launch their own currency at some future date. Interestingly Scotland can not just op in to the Euro, rules require  the country has its own currency and has participated in the exchange rate mechanism for at least two years. So, far from the scare story of being forced to join the Euro, Scotland couldn’t join, even if they wanted to.  Launching their own currency would be costly and difficult at the outset of independence, The economists who work for the UK Government and in the treasury know all of this, and many will work  to ensure an independent Scotland keeps the pound, to many this is just political maneuvering in the hope of maintaining control of Scottish taxation at Westminster.

If Scotland wants independence then so be it, but sorting out the political and economic ties with the rest of the UK, may be difficult. Scotland has to be allowed to stand on its own two feet without the rest of the UK financially and economically supporting it. The Euro proves that more than one sovereign country cannot easily use the same currency. Portugal, Ireland, Greece, Italy and Spain have discovered that you cannot have full independence and share a currency. Another problem is that if the UK Government is to agreeable to a separation, will Wales and Northern Ireland move towards independence? That might encourage similar movements in Catalonia, Belgium, Northern League in Italy, Basques, Cornish, and among the Poles. Careful what you wish for, this could lead to a great deal of internal civil strife.

1 comment:

  1. You make great points Bruce. However, it appears by all accounts that Scotland would survive the delinkage. They have oil at sea and also a huge sub marine port that the UK will pay high rent to maintain. They could also opt to keep the pound sterling as is for the time being. Many countries do till they are comfortable to go it solo. It's not really needed, but their motivation would be using that as an anchor to join the EU. Also given their high balance of trade with other other UK partners, they will not immediately need to look elsewhere for exports. Prepared or not, they are much better than several other countries / nationalities who are seceding, all because of the strong institutions that exist in those islands.
    Let's wait and see what happens in 10 days now.