Currency Union

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FOR THE UNION FOR INDEPENDENCE

A formal monetary union

Professor John Kay told MSPs in May that the opposition of senior Westminster politicians meant negotiating a deal would be "clearly more difficult"[1]. The Scottish Government's proposal for formal monetary union would lead to it have one of nine votes where monetary policy is decided[2] .

Standpoint of the continuing UK

Official advice from civil servants to the UK Government has been that "they would not recommend a currency union to the government of the continuing UK"[3].

Sir Nick Macpherson's letter to the Chancellor

Sir Nick Macpherson, Permanent Secretary to H M Treasury, advised the Chancellor on 11 February that currency unions require extraordinary commitment, and a desire to see closer union between the peoples involved. The Scottish Government’s currency union would take place against the background of a weakening union, running counter to the direction of travel in the eurozone. He made the following points:

  1. The Scottish Government is still leaving the option open of moving to a different currency. Successful currency unions ... are irreversible. Imagine what would have happened to Greece two years ago if they had said they were contemplating reverting to the Drachma.
  2. Scotland’s banking sector is too big in relation to its national income, which means that the continuing UK would end up bearing most of the liquidity and solvency risk which it creates.
  3. The continuing UK would be at risk of providing taxpayer support to the Scottish financial sector. An independent Scottish state would not face the same risk as it is inconceivable that a small economy could bail-out an economy nearly ten times its size. This asymmetry could only cause continuing UK problems unless Scotland is prepared to cede substantially more sovereignty on monetary and fiscal matters than any advocates of independence are currently contemplating.
  4. Treasury analysis suggests that fiscal policy in Scotland and the rest of UK would become increasingly misaligned in the medium term. The Scottish Government had not demonstrated a strong commitment to a rigorous fiscal policy in recent months. Recent spending and tax commitments by the Scottish Government point in the opposite direction, as do their persistently optimistic projections of North Sea revenues. If the dashing of Scottish expectations were perpetually blamed on continuing UK intransigence within the currency union, relations between the nations of these islands would deteriorate, putting intolerable pressure on the currency union[4].
Tripartite declaration

All three of the main UK parties declared on 12 February 2014 that they would not agree to a currency union[5]. Nick Clegg, deputy prime minister told reporters in Aberdeen[6]: "It is simply not going to happen. It is not on offer."

Professor John Kay, a former economic adviser to the Scottish government, a former director of the Institute for Fiscal Studies amd now a visiting Professor of Economics at the London School of Economics, told MSPs in May said he would be sceptical about an agreement being reached, given the likely demands of the rest of the UK[7].

Labour manifesto commitment

Ed Milliband has said that Labour’s 2015 General Election manifesto would include a pledge to block Alex Salmond’s plans to share the pound formally[8].

Effect of a currency union on Holyrood's fiscal powers

Professor John Kay suggested to MSPs in May that talks over a currency union would see "conditions laid down by the rest of the UK Treasury in these negotiations which I think would be very difficult for a Scottish government to accept, because...you would be conceding most of the economic policy levers you would hope to gain by independence."[9]. Professor of Politics at Edinburgh University, Charlie Jeffery, also thinks that if the UK Government did in the end negotiate on currency union it would likely drive a hard bargain on any fiscal sustainability agreement. This could propose tough limits on Scottish taxes and spending [10]

References

  1. BBC News, 7 May 2014
  2. Scotland's Decision: 16 questions (Jeffery & Perman, ed) Question 2 by Angus Armstrong and Monique Ebell (Birlinn)
  3. msn news: Blow dealt to currency union plan 13 Feb 2014 (Retrieved 13 August 2014)
  4. Letter from Sir Nick Macpherson to the Chancellor 11 Feb2014
  5. msn news: Blow dealt to currency union plan 13 Feb 2014 (Retrieved 13 August 2014)
  6. Guardian, 28 March 2014
  7. BBC News, 7 May 2014
  8. Scotsman, 10 August 2014
  9. BBC News, 7 May 2014
  10. The future of the UK and Scotland, University of Edinburgh

A formal monetary union

The Fiscal Commission of the Scottish Government examined four options and concluded that a formal monetary union is the best option both for Scotland and the rest of the UK[1].
A currency union between an independent Scotland and the rest of the UK is still possible, according to Professor John Kay, a former economic adviser to the Scottish government, former director of the Institute for Fiscal Studies, and now visiting Professor of Economics at the London School of Economics[2].
Glasgow University principal Professor Anton Muscatelli says that, despite all main Westminster parties ruling out such an arrangement, failure to deliver a formal shared currency would “hit the deep economic bonds between the two countries, with reductions in cross-border investments as the long-term currency hedging would be difficult, and a cut in trade flow levels.” Professor Muscatelli put the transaction costs in such a scenario for businesses in the rest of the UK at between £500m and £2.5bn. This followed reports that currency investors would be concerned by the loss of North Sea oil revenues on the UK’s current account deficit – which would arise if the UK Government failed to agree a formal currency union with Scotland[3].

Standpoint of the continuing UK

Nobel prize-winning economist Joseph Stiglitz, a former chief economist at the World Bank who serves on Alex Salmond’s council of economic advisers, stated [4]on August 25:
“If you look at the statistics for the similarities of Scotland and England, they are sufficiently similar that a currency area could work.”
Professor Muscatelli has said that rejecting a currency union would be “tantamount to economic vandalism” for the rest of the UK[5].

Sir Nick Macpherson's letter to the Chancellor

Professor Leslie Young, The Cheung Kong Graduate School of Business, Beijing, writing in Sir Tom Hunter's website Scotland September 18 claims that the assertions in the Macpherson analysis are unsubstantiated. The ease of cooperation between nations is determined by their distance apart...not by their “direction of travel”. Independence would still leave the two nations much closer than, say, Germany and Greece. This would make a Scotland-rUK partnership much easier to manage than the Eurozone partnership, especially as the latter comprises eighteen countries[6].
On Macpherson's various points Professor Young comments

  1. The Scottish Government's observation that it would be open to people in Scotland to choose a different arrangement in the future has not been made with any Greek-style crisis in mind. And the Greeks did not want to leave the Euro, and are still members.
  2. [The bank are relocating to English domicile anyway. See Banking]
  3. If Scotland had been independent, but in a currency union with rUK in which it did not “cede substantially more sovereignty on monetary and fiscal matters than any advocates of independence are currently contemplating,” then RBS and Lloyds would almost certainly have shifted their registrations to rUK. The Treasury claim, in effect, that past risky behaviour by investment bankers in London, inadequately supervised by the Bank of England, somehow disqualifies an independent Scotland to be a currency union partner of England.
  4. Scotland when independent would have to keep the money markets satisfied if it was to borrow on advantageous terms, so

the Treasury has no cause to anticipate reckless government in Edinburgh.

Professor Young says that the letter does not even address the question that it purports to answer: whether the currency union is in the interests of the UK, if Scotland voted for independence.

Tripartite declaration

The Guardian reported[7] that a government minister had opined that a currency union will eventually be agreed between an independent Scotland and the remainder of the UK to ensure fiscal and economic stability on both sides of the border. "Of course there would be a currency union," the minister said. The minister, who would play a central role in the negotiations over the break-up of the UK if there were a yes vote, added: "There would be a highly complex set of negotiations after a yes vote with many moving pieces. The UK wants to keep Trident nuclear weapons at Faslane and the Scottish government wants a currency union – you can see the outlines of a deal." The minister said: "You simply cannot imagine Westminster abandoning the people of Scotland. Saying no to a currency union is obviously a vital part of the no campaign. But everything would change in the negotiations if there were a yes vote."

Alex Salmond, the Scottish First Minister, said the No campaign's stance on sterling 'is a campaign tactic, a negotiating position, something to scare the natives up in Scotland'[8].

Labour manifesto commitment

Henry McLeish, former First Minister and an intending "No" voter, commenting on the proposed Labour manifesto commitment to block the sharing of the currency, said "[In] a general election next year, are we really suggesting to Scots than in the event of a Yes vote that we will with the Lib Dems and Conservatives, put up a blocking piece of legislation to thwart the settled will of the Scottish people?”[9].

Effect of a currency union on Holyrood's fiscal powers

References

  1. Scotland's Future (Scottish Government, November 2013) Chapter 3 Finance & the Economy: Currency and Monetary Policy
  2. BBC News, 7 May 2014
  3. Scottish Financial News:Shock independence polls hits sterling and shares as leading economist calls for currency union 9 September 2014 (retrieved same day)
  4. Scotsman Stiglitz attacks No camp Aug 26,2014:
  5. Scottish Financial News, supra
  6. scotlandseptember18.com: Currency Options for an Independent Scotland Part A: The Treasury Advice Against Currency Union (retrieved 30 March 2014)
  7. Guardian, 28 March 2014
  8. Telegraph, 30 March 2014
  9. Scotsman, 10 August 2014