SNP currency plans threaten future stability of Scottish economy

Attempting to put in place an economic system without a fully-functioning central bank or convincing currency arrangements to underpin it, or without the knowledge of whether such a system would be compatible with admission to the EU or not, is like a ship setting sail for voyage without the security of its sheet anchor.

William Bain is Labour MP for Glasgow North East and a shadow Scotland office minister

Whether on the future of the pound, the role of the Bank of England, or the security of pensions, the Yes campaign is on the rack, and the thinly disguised divisions between the gradualists who seek to minimise the full consequences of separation, and the radicals who want little short of a constitutional revolution, are increasingly on full public display.

By trying to be all things to all people at the same time, the Yes campaign has made serious strategic blunders, but the price would be paid by workers, savers, and businesses in Scotland in the event of a Yes vote in next September’s referendum.

The SNP’s Westminster leader Angus Robertson deployed the tired insult to pro-devolution campaigners in an interview for the new Audioboo political podcast Hear Hear last week, that we believe that Scots are too poor or too stupid to go it alone.

The lessons from my weekend’s referendum campaigning in Glasgow North East is that by contrast, Scots are too intelligent to be taken in by the fantasies being peddled by the SNP over the future of the pound, macroeconomic framework, or pensions, on separation.

Abandoning devolution

Scots also know this is a battle between the SNP forces who want to end devolution, and those in Scottish politics who believe in enhancing devolution within the collective strength of the United Kingdom.

On any of the four potential currency options for a separate Scotland in the event of a Yes vote – retaining the pound within a formal currency union with the UK, sterlingisation, the adoption of a separate Scottish pound, or joining the Euro, borrowing costs would be higher in every case. More money set aside to pay for borrowing, and consequently fewer resources available for public services, pensions, or social security in Scotland.

A Scottish state would have minimal powers over control of the money supply unless a separate currency were adopted, reduced influence over UK-Scottish monetary policy, and either the markets or politicians in other states would exert a huge degree of influence over the tax, spending, and borrowing policies followed in Scotland. In any currency union option – either for sterling or the euro – a budget devised in Edinburgh would require to be signed off by Ministers in London or Brussels.

A fiscal treaty between two sovereign states would create a permanent limitation on the fiscal policies a separate Scotland could follow – hardwiring tough commitments on the deficit and public debt into the constitutional firmament of any new state, like the Schuldenbremse (debt brake) in Germany.

The worst of all worlds

The EU accession acquis also makes clear that new states aspiring to EU membership do not receive opt outs in any accession treaty agreed by the existing member states from membership of economic and monetary union, and must make an in principle commitment to join the euro in due course.

The government of a separate Scottish state could find itself having to make a promise to join a currency it says it does not want – the Euro – while at the same time finding it unable to reach agreement with the United Kingdom on using the currency it says it does want – the pound, backed up by the Bank of England as lender of last resort.

Such a situation would be the worst of all worlds for workers and businesses in Scotland. The only way to be sure of keeping both the pound as Scotland’s currency and the Bank of England with the full range of central bank functions to support jobs and growth in Scotland, is to vote to keep Scotland within the United Kingdom.

A formal sterling zone with the UK on the terms proposed by the SNP would leave the UK with a considerably  stronger hand on insisting on sweeping limitations on the fiscal policies a separate Scotland could follow. Unless the Bank of England were authorised to hold Scottish public debt or purchase Scottish gilts or other financial products, or could be authorised to secure common debt –akin to the proposals for Eurobonds at Eurozone level – the Bank would cease to be able to provide direct support through quantitative easing to the Scottish economy at all.

There are no guarantees that agreement could be reached on a sterling currency union at all. The SNP are proposing that Scotland buy a share of the Bank of England, and could appoint delegates to represent Scotland on the Monetary Policy Committee drawing up policy on interest rates and quantitative easing, and the Financial Policy Committee, which has overall responsibility for ensuring financial stability.

The only circumstances in which quantitative easing could be available to Scotland, or delegates could represent Scotland specifically in any monetary policy decisions, would be if the bank became a supra-national institution, akin to the European Central Bank.

As Brian Ashcroft showed last weekend, the argument pursued by Alex Salmond that Scotland would bankroll any currency union is spurious – indeed the loss of oil and gas revenue would make little difference to the balance of payments situation of the continuing United Kingdom.

A Scottish-UK currency union would involve the people of the United Kingdom giving up sovereignty in part over the Bank of England to a state which had seceded – a step with massive economic and constitutional ramifications. The Treasury document finds no overwhelming economic benefit from such a currency union for a continuing United Kingdom after separation, and the loss of political sovereignty may be a prohibitive argument, for both sides in any negotiations.

Neither has Alex Salmond addressed what would be his fall-back currency option if the negotiations could not produce a plan acceptable to both sides – but Scots deserve full knowledge of what this is before they cast their vote in the referendum next September.

Nowhere in the Scottish Government’s Fiscal Commission Working Group initial report is one of the key failures of the Eurozone – the lack of meaningful fiscal union, and the ability to manage economic demand across a potential sterling zone – addressed.

Neither do they address the most recent research which finds that a degree of pooling of fiscal policy is required for an optimal currency union. As omissions go, this is a major one.

Attempting to put in place an economic system without a fully-functioning central bank or convincing currency arrangements to underpin it, or without the knowledge of whether such a system would be compatible with admission to the EU or not, is like a ship setting sail for voyage without the security of its sheet anchor.

Scotland deserves better, and can vote for better, by supporting our continuing partnership for prosperity within the United Kingdom.

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