The Scottish Numpty Party leader Alex Salmond desperately wants to have his independence cake and eat it. He wishes to have DEVOMAX as well as independence on the “independence” ballot and, if the vote is for independence, he blithely imagines that the Queen will remain head of state, defence will be shared with the remainder of the UK (henceforth the UK) and , most tellingly because of his constant boasts about the robustness of an independent Scotland’s economy , that the pound Sterling will continue to be currency used by Scotland. It is the last which I shall concern myself with here.
It is vital that Scotland should not continue to use the Pound as their national currency whilst pretending to be independent, because of the potential and probable damage it could do to Pound and the UK economy .
If an independent Scotland was allowed to retain the Pound the situation would not be like that of a heavily devolved country such as the USA , a single state where general monetary and fiscal policy is set at national level and, most importantly, money can be transferred from richer to poorer parts of the country. Rather, the position of the UK and Scotland split into two independent states would be akin to that of the Eurozone where there is no shared fiscal policy and no ability to move money from richer states to poorer states and chaos currently reigns. Chaos could well be the state the UK and an independent Scotland arrived at and probably sooner than later.
The situation with a UK/Scotland currency grouping could be more extreme than that of the Eurozone, because the Eurozone at least has theoretical rules to prevent member states from debauching the currency. If Scotland simply used the Pound without any rules the situation could deteriorate much more rapidly than the Eurozone, a likelihood reinforced by the much smaller size of the economic grouping UK/Scotland compared with the Eurozone. Whether an independent Scotland would agree to restraints on what they could do with stringent rules designed to protect the Pound is dubious: even more dubious is whether, if they agreed to such rules, they would abide by them when shove came to push .
If there is one thing which international traders and markets do not respond well to it is uncertainty. That is what the sharing of a currency between two independent states would guarantee. At present the Pound is freely traded currency which still has enough international credibility to be held widely as part of national reserves. Foreign investors and traders would rapidly begin to harbour doubts about who was exercising control over a currency being used by two supposedly independent states. Nor would international investors be reassured by the idea that whatever form control took, there would be two economies almost certainly being driven by seriously different political agendas. Without Scottish MPs, the House of Commons would have, at least for quite some time, a Tory majority with a strong free market agenda, an agenda which it is improbable that any likely Scottish Parliament and government would follow. This international uncertainty would extend to British based industry and commerce.
Whether an independent Scotland had no control over the pound or whether it exercised some control there would be serious difficulties. If the Scots had no control over the monetary and fiscal policy set at Westminster, these policies might be directly at odds with the wishes and needs of Scotland. Should that be the case you may be sure that a continuous barrage of complaint would come from north of the Tweed with pleas for monetary and fiscal policies to suit Scotland which might well disadvantage the rest of the UK. These pleas could of course be ignored at Westminster, but that would come at a cost because any serious financial or economic crisis in Scotland would result in a weakening of foreign confidence in the Pound and the general economic performance of not Scotland alone but of the UK and Scotland. This would again create uncertainty at home and abroad.
If the UK and an independent Scotland shared the pound, its fortunes would be judged by those who matter on the economic prospects and performance of the UK and Scotland combined, not as two separate economies. That would leave the UK and Scotland with many new disadvantages and precious few if any of the advantages which the Pound currently enjoys as a currency used by a single nation state with a long history of meeting its obligations.
The worst case scenario would be an independent Scotland which became another Republic of Ireland or Iceland through reckless spending and/or lax credit controls. The Pound would suffer severe consequences no matter how prudently and successfully the economy of the rest of the UK, was managed just as the German economy is suffering because of the less disciplined countries in the Eurozone. In such circumstances the rest of the UK would be faced with a choice between a rapidly depreciating and unstable pound if nothing was done or the provision of vast amounts of English taxpayers’ money to bail out Scotland.
The splitting of Czechoslovakia into the Czech Republic and Slovakia in 1993 is instructive. The official division took place on 1 January. Initially both countries retained the old Czechoslovak currency the koruna, but by 8 February they had set up separate national currencies (each also called the koruna) because the Czech Republic was substantially richer than Slovakia and having the same currency made no sense because she could only be a loser. In effect, the Czech Republic would have been subsidising Slovakia if they had continued to share a currency. (Once the new national currencies were established the Czech koruna traded at a substantially higher value than the new Slovakian koruna.)
In the case of an independent Scotland and UK sharing the Pound the UK (in effect England because Wales and Northern Ireland receive far more from the Treasury than they raise in tax) would be subsiding Scotland. This is because England is by population ten times the size of Scotland, has a much broader based economy and that economy is nowhere near as dependent on public money than Scotland. Even with Wales and Northern Ireland (both heavily dependent on public money) to support England is in far better economic shape than Scotland.
The Scottish private sector is very heavily dependent on a few industries: tourism, whisky, financial services and oil ; the proportion of Scottish GDP derived from public spending is above 60% (http://www.scotsman.com/news/scottish-news/edinburgh-east-fife/60_of_gdp_comes_from_public_sector_1_1412305) and a substantial part of the GDP is derived from the higher per capita Treasury payment to Scotland compared with England – the Scots currently get around £1,600 per head more than the English which gives them around £8 billion more pa than they would get if they were paid the same as the English. (http://www.dailymail.co.uk/news/article-2031543/UK-government-spending-Scots-1-600-year-spent-English.html).
What would there be to stop people in Scotland using the pound as currency regardless of the agreement of Westminster? Nothing in the sense that any Sterling held in Scotland could be used by those living in Scotland just as using the dollar or the Euro in England could be done if people were willing to accept it. But an independent Scotland would have no means of printing Sterling notes or minting Sterling coins, so it would be impractical to run an economy in that way because it would have no means of readily expanding the money supply. In addition, if the Scottish economy deteriorated badly holders of Sterling in Scotland could rapidly shrink the money supply by moving it out of the country.
That brings us to the matter of the three banks in Scotland which at present have the authority to issue sterling bank notes: Bank of Scotland, Clydesdale Bank and The Royal Bank of Scotland. If the Pound was denied to Scotland by Westminster or the Scots did not choose to use it, their issuing powers would be removed.
If the Pound was shared between the UK and an independent Scotland the Sterling banknote issuing rights of Scottish banks would either have to be rescinded or strictly limited. If this was not done Scotland could print as much money as they chose. Such controls over banknote issue would not be difficult for Westminster to enforce regardless of the wishes of a Scottish government. As things stand Scottish banknotes are legal currency as authorised by the Westminster Parliament but not legal tender .(http://www.scotbanks.org.uk/legal_position.php). Not being legal tender means amongst other things that no one is obliged to accept them in payment. That alone would prevent an independent Scotland having carte blanche to issue as many notes as they wanted , because although they could issue them they would be worthless outside Scotland if no one would accept them as they certainly would not. In addition, the note issuing banks are effectively beyond an independent Scotland’s control. RBS is more than 80% owned by the UK taxpayer, the Bank of Scotland is part of the Lloyds group which is 43% owned by the UK taxpayer and the Clydesdale Bank is part of National Australia Bank Group.
But the issuing of banknotes and coins is only a part of the money supply, and a diminishing one at that because of the ever increasing use of credit cards, direct debits and other non-physical money means of payment (http://www.paymentscouncil.org.uk/files/payments_council/future_of_cash2.pdf). In addition there is the ability of financial institutions to expand the money supply by making loans directly to individuals and corporations, the use of state power to “print money” through procedures such as quantitative easing and the general fiscal tenor of a government in terms of such things as credit controls, taxation policy and regulation of the economy, especially the regulation of the banks and their ilk.
If all or any of these matters were left for the UK and an independent Scotland to decide each for themselves there would be inevitably serious political clashes. More fundamentally the effect of clashing policy decisions would be to undermine the Pound and by extension the economy of one or both countries. For example, if the UK introduced credit controls and Scotland did not, Scotland could run into the type of trouble created by the pre-2008 bubble while the UK did not, but the Pound would be weakened by the Scottish behaviour. If the Pound was shared between the UK and Scotland there would have to be very strict rules to ensure that reckless financial and fiscal behaviour was not possible. As mentioned previously, it is very doubtful that an independent Scotland would agree to such rules or observe them if they did officially accept them.
Allowing Scotland to use the Pound would have only disadvantages for England and would carry with it the risk of a sudden and drastic failure if Scotland became another Republic of Ireland or Iceland. For Scotland it would be all benefit because they would gain the advantage of using a recognised currency and know that the rest of the UK would have to bail them out if the Scottish economy went down the pan. Westminster should make it clear now that there is no question of an independent Scotland continuing to use the Pound.
The SNP are peddling a bogus independence .
If they really wanted Scotland to be its own master they would be seeking to establish their own currency not remain with the Pound or become enmeshed in the Euro.