The SNP’s Currency Nightmare

The Chancellor’s contribution this week to the independence debate was dramatic. What does it mean? And where do we go from here?

What the Chancellor said was that there will be no currency union between an independent Scotland and the rest of the United Kingdom. He said this on the basis of independent, expert and hard-headed analysis — all made public — prepared by HM Treasury and signed off by the Permanent Secretary to the Treasury, no less (the civil servant who is leading the UK Government’s ongoing series of Scotland Analysis papers, about which I’ve written before). The Chancellor’s verdict — that it could not be said to be in the best interests of the rest of the UK to enter into a currency union with an independent Scotland — is not a narrowly partisan position adopted in the interests of the Conservatives. It is, on the contrary, a position with which the Liberal Democrat and Labour parties whole-heartedly agree. For the Lib Dems, Danny Alexander gave a statement agreeing with the Chancellor and for Labour Ed Balls wrote in the Scotsman explaining his reasons why a Labour government could not “enter into a new sterling monetary union to share the pound with an independent Scotland”.

None of this means that an independent Scotland could not use the pound. Any country anywhere in the world could use the pound if it wanted to. Likewise, the UK could abandon the quaint notion of having a currency of its own and could use the US dollar if it wanted to. But, for the UK to use the dollar in this way — or for an independent Scotland to use the pound in this way — would have massive drawbacks. (Just pause to wonder: why is it that so few states in the world use the currency of another state? Why is it that most states in the world prefer to have a currency of their own?)

Using the currency of a foreign state without entering into a monetary union means that you surrender the entirety of your monetary policy to that foreign power (in the words of the Scottish Government’s own Fiscal Commission, it would mean that “the Scottish Government would have no input into the governance of the monetary framework”). Using the pound without entering into a currency union would mean that the Scottish Government would have no power to print money. Its borrowing would be in a foreign currency, making it inevitably more expensive. Even if it had a central bank it would have no power to create reserves. Any shock to the economy would have to be absorbed using only fiscal policy (because Scotland would have no monetary policy of its own). Suppose that the oil price crashes (and it is notoriously volatile): any shock to the economy would have to be absorbed by putting taxes up or cutting public spending. Murdo Fraser MSP drives the point home even further:  an independent Scotland unilaterally using the currency of a foreign state would mean, he says, that “there would be no one to stand behind our financial institutions in the event of another economic crisis. That means waving goodbye to RBS, to Standard Life, to Aberdeen Asset Management, to Alliance Trust, and to a whole host of other financial institutions, who would have no interest in continuing to be based in Scotland without that protection. It would be a disaster for the Scottish economy”.

For all of these reasons, surrendering all control over monetary policy is a deeply unattractive option, which is why — perfectly sensibly — the Scottish Government has not proposed it (and why its Fiscal Commission recommended against it). It may well be, however, that it is the position which the Scottish Government will be driven to now that the “three Chancellors” have ruled out a currency union. Their only alternative is to concede that the current SNP leadership have got it all horribly wrong and that the likes of Jim Sillars have been right all along, and that an independent Scotland should have a new currency of its own.

Pausing there, why have the SNP leadership not already adopted this as their policy for an independent Scotland? The Scottish Government’s Fiscal Commission was surely correct to say that it’s this option that would give policy makers in Scotland “maximum policy flexibility”, representing “a significant increase in economic sovereignty”. The answer, of course, is that it would be very expensive, especially in the short term. Everything that currently happens in Scotland in sterling would have to be re-denominated into the new Scottish currency. Every contract. Every mortgage. Every salary. Every wage packet. The new currency might fly. Or it might sink. It would be immediately vulnerable to the verdict of the bond markets, which are notoriously ruthless in attacking perceived points of weakness. Sterling is a safe bet (or as safe a bet as you can get in this game). A new Scottish currency might not be. This is not to say that Scotland is too poor or too wee to have a currency of her own. But it is to say that the SNP have quite rightly realised that the risks are such as to make the option unattractive to the naturally risk-averse Scottish electorate.

Of honourable and dishonourable cases

And here we come to the nub of the problem. There is an honourable case to be made for independence. It’s not a case I would personally agree with, but that’s neither here nor there. There is an honourable case to be made for it. But it’s a case that is honest and upfront with people about the risks involved. It is a case that, in answer to any number of questions about “what would happen …”, says “we cannot be sure, but come with us anyway because, whatever happens, we will finally be free”. This is the case for independence that is made by stalwarts such as Jim Sillars. It’s rooted in faith — an unbending belief that whatever the manifold risks of independence they are worth taking because the goal is so prized. But this is emphatically not the case for independence which the SNP leadership have sought to make. Their case, in stark contrast to the Sillars crusade, is to do as if a vote for independence poses no risk at all. We’ll still have the same Queen, the same pound, the same EU membership. We’ll still share with the rest of the UK a deep social union and a common welfare system. There will be no border controls at Carlisle or Berwick, because we’ll still be in the same common travel area. We’ll still have the BBC. The whole of the SNP’s independence white paper is premised on this approach to independence: the dominant refrain of Scotland’s Future is “seamless transition”.

This choice — the choice of the SNP to go with the “gradualists” led by Salmond and not the “fundamentalists” formerly led by Sillars — has shaped everything about the independence campaign, on both sides of the argument. Better Together would look altogether different if the No vote it was trying to secure was an answer to the question “will you opt for independence despite all its risks”? The SNP leadership are not running the campaign Sillars wants them to run because they know that only a minority of Scots would vote for it. We know that somewhere between a quarter and a third of Scots (and no more than that) would vote for independence no matter what. The campaign which the SNP are running is designed not for these people (who are going to vote Yes in any event) but for the people it needs to persuade: that is to say, for the people who are not yet of the view that independence is worth the risk. And how do you do that? By de-risking it. By doing as if independence can be achieved “seamlessly”.

This would be a brilliant and, for the Unionists, an extremely dangerous strategy but for one flaw. The flaw is that independence can be achieved “seamlessly” only if an awful lot of people sacrifice their own interests to the advantage of the Scots. “Automatic” EU membership for an independent Scotland would happen only if all the other Member States of the EU (including those, such as Spain, with their own separatists to deal with) acted in the interests of Scotland to bend or break the EU’s rules even where it was manifestly not in their own interests for them to do so. SNP bluster insisted that it would be so. When it was pointed out to them, by Better Together, by the UK Government, by politicians from across Europe, by the EU’s own leaders, and by numerous independent academic experts, but only after an awful lot of bluster, assertion and, indeed, deception, did the SNP finally cave. They now recognise, as we had said all along, that an independent Scotland’s EU membership would require to be negotiated and would not be automatic.

Currency union is much the same. A currency union between an independent Scotland and the rest of the UK (“rUK”) would require the Bank of England to play the lead role in ensuring the financial stability of both states; this would make taxpayers in the rUK ultimately responsible for underwriting the financial stability of what would be a foreign power (Scotland having voted to leave the UK). Even with a rigorous fiscal pact agreed between an independent Scotland and the rest of the UK, it was never clear why rUK taxpayers should expose themselves to such a risk. The UK Government said as much in April 2013, when the Chancellor in a speech in Glasgow said that it was “unlikely” he would agree to such a currency union. I wrote about that here.

Enter the Governor

In January 2014 the Governor of the Bank of England delivered a speech in Edinburgh in which he set out the issues in more detail. In particular, he explained how a successful, durable currency union would need a banking union to underpin it and would require each party to the union to share fiscal risks. The Governor made it clear that this, in his words, would require “some ceding of national sovereignty”. What he meant was not only that an independent Scotland would have to cede some of its national sovereignty to the rUK but also that the rUK would have to cede some of its national sovereignty to Scotland. The Governor concluded his speech by noting that “decisions that cede sovereignty and limit autonomy are rightly choices for elected governments and involve considerations beyond mere economics”. His job was to set out the economic considerations that should be borne in mind when figuring out how to make a currency union successful; it is for the politicians then to decide whether acting on these considerations is in the public interest or not.

The Governor’s speech should have left no-one in any doubt that, for a currency union to be successful, the rUK would have to cede a degree of its national sovereignty to the newly independent Scottish state. To anyone with any sense of British politics, that should have been more than enough for folk to realise it was never going to happen. Sovereignty over fiscal affairs cannot be ceded by Chancellors or Prime Ministers acting alone (or even by “three Chancellors” acting together): such a move would require legislation. And the House of Commons is famously reluctant to cede sovereignty to anyone, never mind ceding it to a newly foreign power that had just decided to leave the jurisdiction! Be under no illusions about this: if Scots vote Yes in September, the rest of the UK will feel rejected. And why should a state which has just been rejected then turn round and offer to cede some of its sovereignty to the very country that has just rejected it?

For these reasons, the clarity of the Governor’s January speech confirmed in my mind that the Chancellor’s 2013 position that currency union was “highly unlikely” really meant that it was “inconceivable that the rUK would sign up to it”. There would have been a case, in my view, for leaving it there.

But that’s not how the SNP interpreted the Governor’s speech. They spun it as if it was a slap in the Unionists’ faces. The Governor said that there is a way to make a currency union work — and, moreover, that he could make it work — as long as the political will were there. The political will may be there on the SNP side but, for the reasons given above, if they ever truly believed it was there equally in London they are fools. The SNP misread the Governor’s “we could make this work” speech as an endorsement of the idea that “it will happen”. In other words, they completely overlooked the basic distinction at the heart of his speech between economics and politics. What he actually said was that, economically, a currency union could work but only if the politicians agreed to cede a degree of national sovereignty.

Enter the Chancellor

Mr Osborne’s speech picked up precisely where the Governor left off and dealt more or less exclusively with this all-important question: why would he or any other rUK politician seek to persuade the House of Commons that it was in the interests of the rUK for it to cede a degree of national sovereignty to the newly independent Scottish state?

He dealt first with the SNP’s oft-repeated assertion that a currency union would be in the rUK’s best interests just as much as it would be in Scotland’s. They assert this (as if the SNP are the arbiters of what’s in the rUK’s interests!) because of the large volume of trade between Scotland and the rUK. Keeping the same currency minimises transaction costs and is good for business. Well, yes, all true. Except that only 10% of rUK business is with Scotland, whereas 40% of it is with the eurozone and 20% of it is with the US. On the SNP’s own analysis, then, it would make four times as much sense for the rUK to adopt the euro and twice as much sense to seek a currency union with the USA than to seek a currency union with Scotland. Thus, when the true scale of rUK trade is understood, SNP insistence that a currency union is in the rUK’s best interests rings hollow.

Having dealt with this the Chancellor then explained the political risks that would be entailed for rUK taxpayers in entering a currency union with an independent Scotland. The banking union which the Governor had said would be necessary would put rUK taxpayers “on the line for banks in a foreign country, asking them to underwrite a Scottish Government guarantee on deposits held in Scottish banks and asking them to put their money at risk whenever Scottish authorities extend emergency support to Scottish banks”. Moreover, there would be “little prospect of any benefit flowing in the other direction”, for Scotland could make precious little contribution to supporting a big English bank. What would be in this for the rUK? “Nothing but exposure” was the Chancellor’s reply.

The Chancellor then turned to the fiscal pact: i.e., the second element, along with a banking union, that the Governor had said would be required for a currency union to be successful. He quoted remarks, uttered by both the First Minister and the Cabinet Secretary for Finance, which showed that they had failed to understand the nature of the fiscal constraints under which an independent Scotland would have to operate were it to be in a currency union with the rUK. Contrary to the views of the First Minister, such fiscal constraints would mean that Scotland would not be free to set whatever rates of taxation it wanted; and contrary to the views of Mr Swinney, they would mean that Scotland would not have full control over its tax policy. SNP ministers’ views are “a million miles away from the fiscal risk-sharing the Governor has said is the foundation of an effective currency union”, said the Chancellor. But so, of course, are Mr Osborne’s views. Just like Mr Swinney, the Chancellor would never sign up to the sorts of constraints on tax and spend which the Governor of the Bank of England has said would be necessary for a currency union to be successful.

For all of these reasons, the Chancellor concluded, he “could not … recommend” that the rUK should enter into a currency union with an independent Scotland: “that’s not going to happen”, he stated. “The people of the rest of the UK would not accept it and Parliament would not pass it.”

Nationalist reaction

The Nationalists reacted in four ways, each of them profoundly wrong. First, they said “it’s Scotland’s pound too”, insisting that no-one could take it away from us and that Mr Osborne was “bullying Scotland”. Secondly, they said “if we cannot keep the pound, we’ll not take our share of the UK’s debts”. Thirdly, they said “it’s all just campaign talk, it’s a bluff that will change on day 1 after we vote Yes”. And finally, they said that the Chancellor’s stance was in breach of the Edinburgh Agreement. This last point is perhaps the most disingenuous of the lot, and I’ve dealt with it before. It is time for the SNP’s wilful misrepresentation of the Edinburgh Agreement to stop.

That the SNP reacted in these ways was not surprising. But what has been disappointing is the way that some in the Scottish media — and several commentators who should know better — have failed to see how ill-conceived the SNP’s reaction has been. Let’s look at this in more detail.

First, the line that it’s Scotland’s pound too. This is straightforwardly wrong in law. There is no secret about this. I’ve written about it at length here. I told the House of Commons Scottish Affairs Committee all about it last month. Better Together posted my legal analysis on their Facebook page. And the Treasury’s supporting documentation, published alongside the Chancellor’s speech, contains a perfectly accessible four-page annex on “the legal position of the UK pound”. The currency is not Scotland’s (and it’s not England’s either). It is the currency of the United Kingdom. If Scotland votes Yes to independence it will have voted to leave the United Kingdom: that’s exactly what “independence” means — independence from the United Kingdom. If Scotland leaves the UK it leaves the UK’s public institutions, which would become the institutions of the rest of the UK. The UK’s assets and liabilities would fall to be apportioned equitably between the rUK and an independent Scotland, but the pound is neither an asset nor a liability. Any gold or other reserves left in the Bank of England would fall to be apportioned. So would the national debt. But the pound itself would not. It is Scotland’s pound now because and only because Scotland is part of the UK. If Scotland votes to leave the UK it votes to leave the UK’s pound. 

It really could not be more simple, could it? But it is staggering how many folk get all this wrong. Iain Macwhirter, one of Scotland’s leading political commentators, wrote on his blog that “the pound is common property”. Straightforwardly wrong in law. For Macwhirter, the UK Government setting out and standing up for what is in the best interests of the rUK was as act of “coercion by the UK political establishment, an act almost of economic warfare”. Such bellicose interpretation is so over the top that it would not be out of place on the most extreme of the Nationalist blog sites. STV’s Scotland Tonight has a strong claim to be Scotland’s flagship news and current affairs programme, but its researchers were evidently too busy to read the legal analysis on the position of the UK pound which the Government, the House of Commons and others have published, leaving its hapless presenter to ask the Chief Secretary to the Treasury why his Government were refusing to apportion the pound as an asset and failing to correct the First Minister when he said that the Bank of England is an institution of which an independent Scotland would have a share. An all-party House of Lords committee explained as long ago as April 2013 that the SNP’s plans for sharing the Bank of England post-independence were “devoid of precedent and entirely fanciful” but, since then, neither the Scottish Government nor its Fiscal Commission have done anything to explain why these conclusions were mistaken. One can only assume that this is because they know damn well that they are not mistaken.

As for Scotland refusing its share of the national debt, this is basket-case economics. The debt is currently the UK’s. In order to reassure creditors (and to preserve its credit-rating) the Treasury has made plain that it will continue to honour the debt even in the event of Scottish independence. But this does not mean that Scotland would be born debt-free. On the contrary, as part of the separation negotiations the rUK would secure from Scotland an agreement to service an equitable share of the UK’s debt. There is no chance that Scotland could walk away from this obligation without punishing consequences being imposed at the hands of the international money markets. An independent Scottish state would need to borrow from day 1. There is no question about this (for those in doubt, Ian Smart explains it here). A responsible Scottish Government would do everything it could to ensure that it was able to borrow on the most favourable terms possible. This precludes absolutely any refusal to service a fair share of the UK’s debt.

Conclusion — where does this leave us?

The intervention of the “three Chancellors” has generated a lot of heat. Nationalists are furious. Iain Macwhirter said on television during the week that the Scottish Government genuinely did not see this coming. Their hysterical over-reaction would suggest that, on this score, Macwhirter is correct. But I have to say I find this extraordinary because, as I set out in the opening paragraphs of this post, all the signs were there for those who bothered to read them. As usual with political heat, it will soon die down. And, when it does, we will be able to see that the intervention of the “three Chancellors” has also shone a welcome and penetrating light on an aspect of the independence debates that the SNP had tried valiantly to keep obscure.

This goes back to the point made above about “honourable and dishonourable cases” for independence. The SNP’s entire approach to independence is to do as if, having voting Yes, Scotland will breezily and unilaterally be able to cherry-pick exactly which bits of the old British state it wishes to keep and which bits it wishes now to discard. The currency is just one of several bits that the SNP want to keep. But they present this as if it is a policy that poses no problems: the mere fact that they want it will be enough. Mere assertion that it is Scotland’s pound, as long as it is repeated often enough, will be sufficient to make it so, even when both the law and the interests of the rest of the UK point in diametrically a different direction. Those with long memories will recall that we saw the same tactic deployed in 2011-12, when the argument was whether the Scottish Parliament, without help from Westminster, enjoyed the legal competence to pass legislation authorising a referendum on independence. The SNP insisted, wholly without legal foundation, that it did. The SNP was wrong yet, when the UK Government suggested a solution, they were abruptly shouted down with cries of Westminster “boots” “stomping” all over “Scotland’s referendum”. Over the course of some long months, it was patiently and calmly shown that on analysis, the UK Government had got the law right and the SNP had got it wrong, and Nationalist talk of boots and stomping was replaced with rather more mature language of co-operation and respect. It was the same again with last year’s stramash over “automatic” EU membership. And now we’re on our third go around the same loop. This week’s cries of “bullying” and “economic aggression” will sooner or later give way to a cold, hard realisation that everything the Chancellor has said is based on clear, authoritative, expert and independent economic analysis, all of which has been put freely into the public domain. You can read it for yourself. And, when you do, you will see that it really is not in the interests of the rUK to enter into a currency union with an independent Scotland; that this really is not an unlawful power grab for “Scotland’s pound”; that this really is not a bluff; that a currency union really has been taken off the negotiating table; that it really is not going to happen; and that the UK has compelling reasons for having arrived, calmly and rationally, at this conclusion.

This shines light on the question which we in Scotland have to answer on 18 September: should Scotland be an independent country? Independence means independence from the United Kingdom. Independence means leaving the UK behind. And independence mean leaving the UK’s institutions behind, including the UK’s pound. By all means use the UK’s pound as a foreign currency. Be Panama if that is what you want. It’s your right to choose that for your national destiny if that’s what you want. But be clear about one thing, good people of Scotland. Independence means leaving the UK. Vote for that and you cannot then turn around to demand that the bits of the UK you actually like (such as the pound) come with you. Are you in, or are you out? Are you staying, or are you going? It’s your choice, Scotland. And this week, thanks to the Chancellor, we found some much needed clarity about what, precisely, that choice entails.