APPENDIX 6: ALTERNATIVE CURRENCY OPTIONS
TO STERLING
The currency choice facing Scotland can be summarised
by three basic options: one is the pound sterling; another is
an independent Scottish pound; and the other the euro.[193]
Ms Ruth Davidson MSP reminded us that over the last 25 years the
Scottish National Party has preferred each of the three options
at different points in time.[194]
Moreover, there is no reason to suppose that the currency chosen
immediately upon gaining independence would be the permanent choice
of currency thereafter. For example, the Fiscal Commission Working
Group leaves open the possibility of moving to an independent
currency at some stage in the future. Also governments of the
euro zone are making some fundamental changes to how they operate
which may, in time, make it a more or less attractive proposition.
These alternative currency arrangements are considered below.
An independent Scottish pound
An obvious option for an independent Scotland would
be to introduce a new currency or Scottish pound. Professor John
Kay of Oxford University pointed out that one of the obvious marks
of independence is that you have an independent currency.[195]
This is not simply emblematic but can avoid many of the
constraints on economic policy which follow from the other currency
options. In this sense, only an independent currency is full independence.
There are several countries in Europe with a similar
size population and level of wealth to Scotland which operate
perfectly successfully with their own currency. A Scottish pound
would require a new Scottish central bank to issue the currency,
to oversee the financial system and to conduct monetary policy
on behalf of the Scottish Government. An advantage of this arrangement
is that having an independent central bank and independent currency
would achieve two of the three necessary conditions if Scotland
wishes to join the euro zone at some time in the future.
Having an independent currency inevitably involves
trade-offs. On the one hand an independent currency gives a government
the greatest scope for monetary and fiscal policy to be tailored
for local circumstances.
On the other hand an independent currency leads to
transaction costs not simply the percentage taken by the money
changers but the much greater costs in dealing with the uncertainty
of a variable exchange rate. This would make planning more difficult
and expensive, particularly for businesses conducting their affairs
across the border and those travelling across the border. The
costs of managing the exchange rate risk would be a direct burden
on businesses in Scotland and the rest of the UK. Movements in
the exchange rate would also lead to changes in relative wealth
between those living north and south of the border.
To avoid some of the costs arising from exchange
rate volatility the Scottish pound might be pegged to sterling.[196]
If the Scottish pound were to be pegged to sterling the monetary
policy of the Scottish central bank would need to closely follow
the Bank of England's policy, thus losing one policy lever and
undermining the reason for introducing the new currency in the
first place. There would continue to be a greater degree of freedom
for setting fiscal policy although in practice this would depend
on the level of debt of an independent Scottish government.
Many witnesses drew the comparison to the progression
of currency arrangements in Ireland after the Anglo-Irish Treaty
in 1921 and possible currency choices for Scotland. Sterling continued
as the currency in Ireland until 1928 when the Irish punt was
introduced. This was managed by a currency commission (or currency
board) until the central bank was set up in 1942. The punt remained
linked to sterling and the central bank operated as a de facto
currency board policy until joining the European Exchange Rate
Mechanism in 1979.[197]
The punt then depreciated several times within the ERM and
fluctuated significantly against sterling.[198]
Until 1979 both currencies circulated interchangeably
in Ireland but "it was hard to get a cab driver in London
to accept an Irish punt".[199]
Professor Gerald Holtham, Chairman of the Independent
Commission on Funding and Finance for Wales, explained that if
an independent Scotland were to set up a currency board then "you
are importing your monetary policy from England effectively but
you do not have a lender of last resort and, to that extent, your
financial institutions may be regarded as more vulnerable and
you may have to pay higher interest rates for your debt".[200]
Professor Gavin McCrone described how the Irish Government's
fiscal policy was very tightly constrained by the need to maintain
the currency link.[201]
If an independent Scotland were to introduce a Scottish
pound perhaps the greatest problem would be the transition from
the current to the new regime. Those in Scotland would take a
view as to the likely long term value of the Scottish pound and
sterling. Capital movement in either direction in anticipation
of the new currency could make the initial transition very challenging.
When choosing across the currency options the pros
and cons of creating a new currency must be weighed against those
of the other currency options. Professor Kay suggested that
if one is pushed towards a new currency it is mainly because in
the present circumstances it might be quite difficult to negotiate
what would plainly be the best arrangement from Scotland's perspective,
which would see the Bank of England continuing to be the monetary
authority for both Scotland and England, with a substantive monetary
union between the two independent nations.[202]
A monetary union may of course undermine much of the raison d'être
for independence in the first place.
The euro
The Scottish Government has stated that an independent
Scotland would seek to join the EU. All nations in the EU are
required to join the euro with the exception of the UK and Denmark
who negotiated opt-out clauses. This may not bind Scotland to
any fixed timetable for euro zone membership but a clear commitment
to joining would be required as there is no reason to believe
that an opt-out would be negotiable.
Mr John Swinney MSP, Cabinet Secretary for Finance,
Employment and Sustainable Growth in the Scottish Government has
stated that he "cannot foresee circumstances in which an
independent Scotland would want to join the euro."[203]
In the near term this is likely to be the case. The third
requirement for joining the euro (along with an independent currency
and a central bank) is meeting the so-called convergence criteria
or Maastricht criteria. On any reasonable division of assets and
liabilities it seems unlikely that an independent Scotland would,
according to Professor Kay, meet the:
"criteria on the kind of envelope numbers
one would have from an independent Scotland, so that would not
arise as an immediate issue. I also suspect there is a lot less
inclination on the part of people in Europe to bend the rules
in favour of letting additional countries into Europe now."[204]
The structure of the European Monetary Union is however
changing significantly. There are clear plans to move towards
closer political and fiscal integration with a single bank regulator
and possibly a common deposit insurance scheme. If Scotland were
eventually to join the euro zone it would have a seat on the European
Central Bank by right and have an equal vote with all other members.
This would avoid the difficult governance issues with the UK government
over the Bank of England which would arise if Scotland keeps sterling
as its currency. Over time euro zone arrangements may become more
agreeable than the alternative choices.
Professor McCrone raised doubts about whether
an independent Scotland could maintain its competitiveness within
the euro zone:
"Monetary unions only work if inflation
is at broadly comparable rates between the member states
Countries with their own currencies can restore competitiveness
by devaluation, but within the euro zone this is impossible
Certainly Scotland would be wise not to join the euro, at least
if there is any doubt at all about its ability to maintain the
competitive position of its economy against other euro zone countries."[205]
However, the case of Ireland may yet show that realigning
competitive positions may in fact be possible, albeit at some
price.
193 Q 67 Back
194
Q 588 Back
195
Q 69 Back
196
ibid. Back
197
Patrick Honohan, Currency Board or Central Bank? Lessons from
the Irish Pound's Link with Sterling, 1928-79 Back
198
Gavin McCrone, Matter of no small change, The Scotsman 28 February
2012 Back
199
Q 71 Back
200
Q 344 Back
201
Gavin McCrone, Matter of no small change, The Scotsman 28 February
2012 Back
202
Q 69 Back
203
Q 887 Back
204
Q 67 Back
205
Gavin McCrone, Matter of no small change, The Scotsman 28 February
2012 Back
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