In my contribution to People Power on the fiscal implications of constitutional change I argued that a vision of independence within a Sterling zone, that doesn’t even exist, has major limitations.
“Handing over monetary policy to rUK also limits the scope of fiscal policy. We only have to look at the Eurozone crisis debate to see the link between monetary and fiscal policy. If the key economic levers are controlled by another country, then there is less influence on monetary, and fiscal, policy than under devolution.”
Professor Brian Ashcroft in his Scottish Economy Watch blog has developed this point further. Referring to Alex Salmond’s “flip flop” on whether Scotland would have to sign up to a fiscal stability pact if an independent Scotland adopted sterling, he says:
“There is no doubt in my mind that if an independent Scotland adopts sterling then it should enter into a formal monetary union arrangement with the rest of UK government and agree/accept a fiscal stability pact.”
He sets out the reasons for this in some detail in the blog. The Scottish Green Party might also like to consider these points given their plan for a separate currency.
However, even if the rUK was prepared to agree such a fiscal stability pact, it comes at a price. As Brian Ashcroft points out, there will still be a risk premium on borrowing costs, because small countries have more volatile finances, particular Scotland with its dependency on oil revenues. I would add that it is inconceivable that the Bank of England would not put other fiscal and monetary conditions in such a pact. It all adds up to something far short of real independence.