The whole concept of why currency is important to the referendum on Scottish independence is a complex one – even though currency itself is relatively simple! I’ll try to deconstruct the reasons why in this series of blogs.
Firstly, I want to focus on why the Yes campaign are sticking to the position outlined as the optimal solution in the Fiscal Commission that an independent Scotland should enter a formal monetary union with the rest of the UK (rUK) in a Sterling Zone.
The reasons for forming a formal monetary union are contained within 2 key points:
- It allows the electorate (& businesses in Scotland and the rUK) to adapt to the new circumstance of an independent Scottish parliament without simultaneously going through the process of changing to a new currency.
- It ensures that Sterling remains stable, giving the rUK time to adjust their political structure and priorities while they find their feet without the Scottish tax & balance of payments contributions.
The first of these points is essentially one that ensures effective democratic accountability to the people of the newly independent Scotland and the rUK. Both Scotland and the rUK will be fundamentally changed, with the people in each area now having a government closer to society than we currently have (albeit more clearly in Scotland where our size of government would seem optimal as I previously commented on), however retaining the link between Scotland, England, Wales and NI and the central bank for Sterling (perhaps confusingly named the ‘Bank of England’) simply removes one variant for the subsequent years.
The second of these points is more practical and economically more serious. The reason the Yes campaign are keen to linger on the case that the Westminster government is calling a bluff is because they are keen to demonstrate how strong the Scottish economy is and how much Sterling relies on the contributions that come from Scotland. Cameron made a subtle reference to this fact in his speech about Scotland earlier this month when he said ‘Scotch whisky adds £135 to the UK’s balance of payments every single second.’ Of course, he could have echoed the point made by Energy Minister John Hayes last year: ‘Oil & Gas sector is the single largest industrial UK investor, supporting 440,000 jobs, and benefits the UK’s trade balance to the tune of £40 billion each year’ (see my previous blog post for more on that). The Yes campaign are keen to linger on this point to ensure that there is recognition that an independent Scotland could expect to start with healthier state finances than the rUK (as reported by the Financial Times).
However, perhaps history has been removed from the curriculum at Eton and as such the cabinet in Westminster might be unaware that the pound Sterling and UK economy collapsed less than 40 years ago. In 1976 the UK government had to apply to the International Monetary Fund for a loan of record proportions such was the instability of the pound. This loan was underwritten by the revenue generated from recently flowing North Sea oil (first production from the Forties field was in 1975). The process outlined as preferential by the Scottish Government is designed to ensure the transition to independence occurs with economic stability for the newly independent Scotland and the rUK.
One of the main concerns raised about establishing a monetary union is the intended duration for such an arrangement. I think the appropriate timeframe would be until ~2020 for the next round of rUK / independent Scotland government elections where the political parties can stand for election with their continued currency position outlined to the electorate.
The fact that the Westminster establishment are discarding these two fundamental considerations demonstrates their disconnect from serious issues if they are not bluffing; the alternative is that they are bluffing which demonstrates their desperate turn to fear tactics in the absence of a reasonable argument for Scotland remaining in the UK. The Westminster position stated by Osborne is essentially tantamount to look we are a dysfunctional establishment with no regard for democracy or societal issues; you really should stick with us. Surely the majority of people will follow the train of thought articulated by Kevin McKenna and reject a government that stands on such shaky principles.
Ultimately, the Fiscal Commission reviewed 5 monetary options for an independent Scotland and each of those options has its merits. I expect the Yes campaign to continue to promote the virtues of a formal monetary union to ensure the reasons for this proposition are fully recognised. There are still 7 months to go before the referendum, which gives time to articulate the favoured option in absence of a willing partner in the rUK.