What Sturgeon Didn’t Tell You About Currency

BY EFFIE DEANS

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.  

The Excellent Effie Deans writes at Lily of St. Leonard’s here.