Matthew Pitt argues why an independent Scotland would be foolish to keep the pound without the UK's agreement
By Matthew Pitt
The political heavyweights in Westminster are beginning to fathom the dire consequences of letting Alex Salmond build up unhindered his own arguments for Scottish separation.
His vision for Scotland’s future are rather catching and seem to hail in a new era of prosperity, growth and power for everyone. But pierce through the superficial shell of Salmond’s broad assertions and you quickly begin to realise that it rings rather hollow and is missing something fundamental. In other words, it lacks substance.
Take Scotland’s currency. The House of Commons Library has just published independent research (pdf) on the issue, which is published alongside this article for the first time and will be quoted throughout.
The SNP have moved in favour of keeping the sterling, with or without an agreement with the remnants of the UK, instead of issuing its own currency or using the euro. Known as the process of dollarization – or sterlingisation in this case – a separate Scotland would retain the pound either by way of a currency union or unilaterally. For now, I will focus on the latter option.
The most crucial part to understand about sterlingisation is that a separate Scotland, without a currency board, will have no control whatsoever over monetary and exchange rate policy. Salmond has been mistakenly pushing the argument that goes along the lines of:
‘The Bank of England has had independent control over monetary policy since 1998 and therefore will continue to take Scotland into account’.
Not so. The Bank of England is currently obliged to regard the effects its decisions will have on Scotland. Without Scotland being part of the UK and with no currency board, this will not apply. In other words, decisions that have an impact on Scotland will be taken in another country that is focused on stabilising the national economy, not the Scottish one.
Instead of actually attaining independence, a separate Scotland will ironically tie itself to the rest of the UK through the importation of the effects of monetary policies conducted by the Bank of England.
The independent Library research paper states that it is thereby “more directly and irrevocably exposed to instability in [the rest of the UK]” by sharing a currency and adhering to the decisions by the central bank on matters of inflation and interest rates.
One of the many issues that slippery Salmond continues to dodge that I wish to address is that of Scotland being left with no lender of last resort.
To take just one example, the Bank of England presently oversees the provision of short-term liquidity to failing banks – logically a rule that will not apply to banks in a State of Scotland. Acting as a poor replacement for a central bank, the only entity able to step in and rescue the banks from collapsing is the Scottish government itself.
Added to this, the financial services bill that is going through Parliament will allow the chancellor, under clause 57, to give directions to the Bank of England governor on matters of support for the financial system or companies where there is the potential involvement of public funds. Still think the Bank of England will step in?
Without power over monetary policy, the Library research paper points out that any such institution would be:
“Unable to respond to a crisis affecting the entire banking system because its inability to print money”.
Vitally, this obviously:
“Means [Scotland] cannot guarantee the whole payments system, or fully back bank deposits.”
Such impotence is underlined further by the report stating that the Government acting as the central bank:
“cannot be an unlimited lender of last resort and it can literally ‘run out of money’ to respond to crises”.
What this entails is that the absence of any lender of last resort will actually:
“in itself make a crisis more likely.”
It is almost unnecessary to point out that Scotland would be unable to bail out its banks, even if a minor financial crisis occurred – as was admitted by Salmond.
The Edinburgh-based Royal Bank of Scotland, an entity that Salmond actively encouraged to make the disastrous takeover of ABN Amro a reality, had to be bailed out during the financial crisis and exposed the UK government to a total of £187 billion, of which £129bn are toxic assets.
To make sense of this, the nominal GDP of Scotland in 2010 was about £111bn.
“The disaster that overtook the bank was made in Edinburgh not London”.
Instead of standing truly on its own two feet and forming its own destiny, a separate Scotland under Salmond will give up many powers that a ‘normal’ State enjoys.
It will put the country in danger of being incapable of responding to another financial crisis and being tied to monetary decisions made in another country that will have a direct effect on pensions, mortgages and savings.
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• Credit rating agencies weigh in on independent Scotland – Alex Hern, February 6th 2012
• Polls apart? The news for the SNP might not be as good as it looks – Ed Jacobs, February 6th 2012
• Swinney on Scotland currency – more questions than he answers? – Ed Jacobs, February 2nd 2012
• Salmond’s Scottish referendum is a textbook example of a leading question – Alex Hern, January 27th 2012
• Questions multiply over financial status of an independent Scotland – Alex Hern, January 20th 2012