No-one can stop us!

"No-one can stop us using the pound!"

That is true. No-one could stop us using the dollar or the yen either, if we chose to do so. It just wouldn't be smart. Neither would using the pound outside the UK currency union.

No-one can stop Panama and Ecuador using the dollar, so they do use it. But the dollar is a foreign currency, controlled by a foreign country. These two Latin American countries allow the USA to enforce fiscal and monetary discipline upon them because they can't easily do it themselves. They have to generate trade surpluses in order to accumulate domestic spending power. Their governments are not masters of their own economies.

So if Scotland wants to wrest control of monetary policy away from London only to hand it straight back again, this time with no influence over it whatsoever, then yes, no-one can stop us.

On the other hand, good luck generating the trade surplus needed to pay for the promised fairer society after the financial services industry has been forced to move south of the border in order to stay in the same jurisdiction as its lender of last resort. Most Scottish financial products are exported to the UK.

Good luck obtaining a fair share of The Bank of England's foreign currency reserves after you've refused to take a fair share of the UK national debt.

Good luck finding people to purchase Scottish government bonds when you've shown yourself likely to default whenever you don't get what you want.

But we can always console ourselves with the thought that no-one could stop us!

Scotland's Future

Imagine that you are a banker. (If you are not already a banker this may be hard, but please try.) On a certain day you have appointments with each of a newly divorced couple, both of whom require loans to help them on their separate ways. The divorce has been acrimonious and reported in the press. Partner A has repeatedly threatened to accept no responsibility for the debts incurred on their joint account, not even those incurred in making purchases on his own behalf. He has now changed his mind. Partner B has gone on settling all debts as usual. Bearing in mind that, as a banker, your first responsibility is the security of your own funds, to which of the couple will you be more inclined to lend?

Amongst all the sound and fury surrounding the launch of the White Paper 'Scotland's Future', one figure has received surprisingly little attention. It is projected that in the first year of independence the Scottish Government will require to borrow £4.4 billion.

This is the same Scottish Government that:

1. has repeatedly threatened not to accept a share of the UK national debt,
2. denies Scotland's responsibility for the actions of a Scottish Chancellor in raising the UK national debt in order to bail out failing Scottish banks,
3. is already spending beyond its means,
4. has promised yet more spending in pursuit of a fairer society,
5. is about to destroy Trident-related jobs by the thousand,
6. is committed to a currency union and thus will not be able to set its own monetary policy.

Are you still imagining that you are a banker? You are not of course a Scottish banker, since the major Scottish banks are no longer Scottish owned. You are a foreigner and this Scottish Government is asking you for £4.4 billion. This year.  Alternatively you could lend to the RUK government which also needs a loan.

Bearing in mind that, as a banker, your first responsibility is the security of your own funds, what will you do?

Sharing a Currency

A modern economy is based on achieving efficiency by specialisation and then exchanging produce with other specialists. A currency facilitates exchanges because it gets round all the problems of having to barter. You might therefore think that in principle it would be good to share a currency with as many as possible of those with whom you hope to trade. The problem is that a currency has to perform other functions too. For example it measures value and value is not the same everywhere and to everyone.

The Euro was the EU's response to the failure of attempts to fix exchange rates between EU members by means of the so-called 'Snake'. The Snake was overwhelmed by market forces. Politicians believed that this could not happen to a currency union. The truth is that a currency union does not make the market forces go away, it simply diverts them into other channels.

The Euro is not a currency in which all members are equal. For most of the Eurozone's members it is effectively a foreign currency except for the absence of exchange costs. Market forces do not give equal weight to small economies and big economies. This means that all along the Euro has been in reality a Deutschmark-lite.

If you use a foreign currency you also accept a foreign country’s monetary policy, whether it is appropriate for your economy or not. You cannot simply demand that the foreign country takes account of your needs if they conflict with its own. 

Inappropriately low Euro interest rates before 2008 therefore fuelled unsustainable credit expansion and property booms in several weaker economies than Germany that needed more monetary discipline. This contributed to a series of crises as soon as the currency union came under serious stress. Meanwhile for Germany the Euro offered an artificially lowered exchange rate that allowed faster export-led economic growth than was justified by German costs of production.

Just like the Euro in Ireland or Greece, the pound will be effectively a foreign currency for an independent Scotland whether or not a Sterling Area is agreed and whether or not parity of status is claimed by politicians.  RUK is about ten times the size of Scotland.   An independent Scotland using the pound will have to accept what will essentially be the RUK's monetary policy.

The claim that an independent Scotland would become entitled to a seat on the Bank of England's Monetary Policy Committee is misleading at best. The independent status of the Bank (since 1997) precludes any government exercising influence over the MPC, which comprises Bank executives and independent economists. The UK Treasury representative who attends its meetings is not allowed to vote. Who could imagine that a Scottish government representative, even if allowed to attend, could have a greater role?