Currency union is now sunk – time to launch Plan B

As the Red Paper warned in 2012 (People Power – Fiscal Implications of Constitutional Change), the currency union was always a flawed concept – for Scotland as well as the rest of the UK. The statements by the Governor of the Bank of England, The Chancellor, The Permanent Secretary to the Treasury and Ed Balls – means it is dead in the water. 

Alex Salmond’s response is more ‘bluff and bluster’, with the ‘bullying’ charge the most absurd. As Scotland has the right to self-determination, so does the rest of the UK. If they choose not to join a currency union then that is their right. There are very good reasons why they don’t want a currency union and these were clearly articulated by Martin Wolf in his Financial Times column. Equally, the notion that Scotland owns the pound and the Bank of England is frankly risible. We may be entitled to a share of the assets and liabilities of the UK, but if we separate, we also separate from the institutions of the UK. Independent countries create their own institutions. 

The Permanent Secretary to the Treasury has taken the unusual step of publishing his advice to ministers on this point. His key reasons for ‘strongly’ advising against are worth reproducing in full: 

“First, the Scottish Government is still leaving the option open of moving to a different currency option in the longer term. Successful currency unions are based on the near universal belief that they are irreversible. Imagine what would have happened to Greece two years ago if they had said they were contemplating reverting to the Drachma. 

Secondly, Scotland’s banking sector is far too big in relation to its national income, which means that there is a very real risk that the continuing UK would end up bearing most of the liquidity and solvency risk which it creates.  

Thirdly, there is the problem of asymmetry. The continuing UK would be at risk of providing taxpayer support to the Scottish financial sector and sovereign. 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.  

Finally, Treasury analysis suggests that fiscal policy in Scotland and the rest of UK would become increasingly misaligned in the medium term. Of course, if the Scottish Government had demonstrated a strong commitment to a rigorous fiscal policy in recent months, it might be possible to discount this. But recent spending and tax commitments by the Scottish Government point in the opposite direction, as do their persistently optimistic projections of North Sea revenues, which are at odds not just with the Treasury but with the Office of Budget Responsibility and other credible independent forecasters.” 

Instead of digging himself into an even bigger hole, the First Minister would be well advised to develop a credible Plan B. Brian Wilson summed it up, robustly but well in the Scotsman. Playing the victim might get some short-term traction, but the closer we get to the referendum, voters will be more focused on the impact currency uncertainty has on their savings and pensions.

The irony is that there are other options available. Some have even been suggested by his, much vaunted, Fiscal Commission. Others in the Yes camp have fairly argued that a currency union is not in Scotland’s interest, as did Martin Wolf. We shouldn’t forget that the currency union is actually a U-turn for Alex Salmond. In 1999 the SNP favoured joining the Euro, later that year he described the pound as “a millstone round Scotland’s neck”. 

The risk is largely political, not economic. The focus groups say keep the pound, so a strategy has to be found to keep the sinking ship of the currency union afloat. Sorry, but that ship has now sunk, so he needs to develop a credible Plan B and win political support for it. The longer he puts off the inevitable, the more difficult that task will be.

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