With the bridge over the Kerch Straight having just
been blown up and Russia threatening “judgement day”, it is hard to believe
that the SNP is still considering an unofficial independence referendum in a
little more than a year. I know let’s abolish the British Armed Forces and
leave its nuclear deterrent homeless just when Mr Putin is threatening us with
nuclear war. Sounds like a plan.
But even so it is necessary to counter SNP arguments
and misconceptions because they form a key part of the debate in Scotland which
determines how we vote. We have now reached perhaps the most important of those
arguments and the one that destroyed the SNP’s chances in 2014. What currency
would Scotland have after independence?
The SNP’s preferred option in 2014 was to retain
sterling in a currency union with the former UK. But as with every one of the
SNP’s plans for independence just because you ask for something doesn’t mean
you get it. This is obviously the case when you depend on the agreement of
someone else. The UK Government wasn’t interested in currency union and for a
very good reason.
Euroland has currency union without political union,
but it at least is theoretically moving towards political union. If Scotland is
moving in the opposite direction, it makes no sense for it to seek currency
union. It would make the Bank of England play the role of the European Central
Bank to a foreign land Scotland, it would turn the pound into the equivalent of
the Euro and would bring few benefits to the former UK but many liabilities.
Faced with refusal Alex Salmond said that Scotland
would use the pound unofficially. This is known generally as dollarization or
in this case sterlingisation. Using
another countries currency unofficially is the sort of thing that third world countries
do when they face hyperinflation or other forms of economic chaos. There is a
very good reason why no member of the G7 or even the G20, indeed no first world
country uses someone else’s currency. It’s a sort of last resort, when a
country is failing.
The main disadvantage of sterlingisation is that you
cannot print money and you do not have a central bank that can act as a lender
of last resort. In the recent crisis the Bank of England intervened because the
gilt market was damaging pension funds. If Scottish pensions were being damaged
Sturgeon might ask nicely for help, but the Bank of England would be under no
obligation to do anything.
If a Scottish bank failed the Bank of England might be
kind enough to help, it might even see it as in the interest of the former UK
to prevent a Scottish bank failing, but again it would be under no obligation
to do so. Scots with money in that bank might lose all of their money, unless
the Scottish Government had enough to bail them out.
My immediate response to the prospect of Scottish
independence would be to sell everything I own in Scotland, rent a small flat
in England and move all my assets to an English bank. I would then rent a small
flat in Aberdeen and continue working here. I would advise everyone with any assets
to do something similar. But this would of course be a disaster for an
independent Scotland. It would face capital flight before it even began.
The SNP has slightly changed its argument however. It
now says that eventually Scotland would adopt its own currency, the Scottish
pound. Why not argue that Scotland would do this immediately? The reason is
that the SNP thinks keeping pound sterling is necessary to win independence. If
you tell Scots that independence means giving up the pound, the majority will
choose to keep the pound and stay in the UK. The SNP argument is we may
eventually have a Scottish pound, but don’t worry about it we wouldn’t do that
for years.
But the disadvantages of sterlingisation are such that
the SNP might have to act quicker than it thinks. The first economic crisis
faced by an intendent Scotland might see it have to set up a central bank and
currency in order to print the money to pay the bills.
Using someone else’s currency has the disadvantage
that you cannot create money, but rather have to buy it. While the Bank of
England can add liquidity at will using quantitative easing, there would be no
central bank in Scotland to do likewise. It is for this reason that Scotland
would face a default risk, because it would not have its own currency that it
could print. It is for this reason that sterlingisation might not last. It would
also mean that Scottish borrowing costs, including mortgages would be much
higher, because of the risk of default, that we do not face now.
There are huge benefits to having your own currency.
This is why most countries have them. But in Scotland’s case there are also
disadvantages. We are used to going to other parts of the UK spending pounds
without having to change them. At this point it is worth pointing out to
certain Scottish nationalists that currency and bank notes are not the same
thing. You may or may not have to exchange Scottish bank notes for British
ones, but you exchange them at 1:1 because they are the same currency. If we
had a Scottish currency the rate of exchange would be determined by the
currency markets.
At the moment most Scottish trade is with other parts
of the UK. We buy things on Amazon we pay pounds we receive the goods the next
day. But if Scotland had its own currency, it would be like buying from
American Amazon or German Amazon. You have to exchange currency and you pay a
fee to do so and you usually get a worse exchange rate than the market rate.
But look at your local Tesco. There are products made
in Scotland, but huge numbers of products either come from other parts of the
UK or from abroad. Scotland does not have a port at present that could handle
trade from the rest of the world. So, after independence vast numbers of
products would have to be transported from English ports and then on English
roads and every time, we would pay these ports or lorries or buy these goods we
would have to change currency.
Of course, we could build a port capable of handling
all trade, but there would be a cost involved, there would also be a cost
involved in ships having to sail further from mainland Europe and make a
special journey just for us.
Whenever I want a good or a service now, I simply look
on the internet, choose and get the same price as everyone else in the UK, but
after independence and a change of currency I would have to recalculate the
price. This is assuming that former UK goods or services would even available
to me. After all I don’t buy French or German insurance or use an Italian
internet provider. Former UK providers might decide it is too complex or
unprofitable to sell to deal with cross border changes in laws and regulations
just as some of them decided it wasn’t worth dealing with the Northern Ireland
Protocol.
But this isn’t the end of the SNP’s journey. The first
stage is for Scotland to use the pound unofficially. We would have no say over
monetary policy such as interest rates. We would have no way of providing
liquidity. These issues would be solved by having our own currency. But just as
we were finally in charge of our own monetary policy and able to bail out our
own banks, we would then have to promise to give it all up again as we would
immediately be on a pathway to joining the Euro.
At this point SNP supporters point out the countries
in the EU that don’t use the Euro. Some of these have opt outs which are not
available to new member states, but others like Sweden just keep using their
own currency regardless.
Now we don’t know how the EU would respond to
Scotland. It would depend on whether Scotland left the UK with consent or not.
If Scotland left after an unofficial referendum Spain might not recognise
Scottish independence. Other EU member states would be nervous about setting a
precedent that would encourage their own independence movements. On the other
hand, the EU would be delighted to have revenge for Brexit.
But on balance Scotland is going to have to play by
the rules if it wants to join the EU. It won’t be possible to promise and not
mean it. It is also not going to be possible to apply to join the EU while
still using the pound unofficially. It is a condition for EU membership that you
fulfil certain economic conditions and are ready to take part in monetary
union. This means you cannot join the EU unless you have your own currency and
central bank. No one has.
Of course, the EU might change the rules for Scotland.
We’re special and hate Tories and Brexiteers. We wave EU flags.
But this means anyone with assets in Scotland is
facing two changes of currency, quite possibly in quick succession. Firstly,
everything you own will be converted from pound sterling to Scottish pounds and
then a little later into Euros.
The Euro has advantages and disadvantages. It doesn’t
make sense to have a currency union without a political union, but in other
respects people across the EU happily use the Euro and it has the advantage
that they don’t face the costs of exchange rates when travelling or buying from
other EU countries.
But I absolutely do not fancy changing everything I
own from pounds sterling to pounds Scots and then to Euros. I have no idea
whether what I ended up with would have the same buying power as it does now.
No one does. It would depend on decisions made by the markets and the EU.
When a currency falls, we know that it can be more
expensive to buy things on holiday. Well, what happens if I have a debt is in
sterling such as a mortgage and the Scottish pound falls in relation to sterling?
What happens if the Euro falls against sterling? Suddenly our whole financial
future depends on the fluctuations of the currency markets and how these will determine
what we buy and what we owe.
The final thing that the SNP has not told you is that
Scottish pound notes would immediately cease to be issued after independence.
To continue printing them would be the equivalent of Panama trying to print US
dollars. The word for this is fraud. Scottish bank notes depend on us using the
same currency. They depend on us being part of the UK.
The best currency option for an independent Scotland
is undoubtedly to initially have its own currency and then join the Euro. That
is certainly what would happen quite quickly. But this option is much worse
than continuing to use the pound as we do at present.
Not only would Scotland have to deal with the
difficulties involved in setting up a new state we would also have to change
currency twice while dealing with a cost of living crisis and a war in Eastern
Europe.
To do all of this simply because you detest the Tories
who gave you furlough and then provided you with a free vaccine and now cap the
cost of your heating, is at best ungrateful at worse self-destructive in its
folly.
