Wednesday 3 September 2014

The Scottish Currency Union delusion

With the momentum strongly with the Yes campaign, Scotland could be hurtling towards independence. Certainly the passions North of the Border have been aroused and the vote may well get close to 80% turnout. On that basis it would seem more likely that Yes might just squeak a win.

In trying to defend the status quo, the political party leaders at Westminster have been determined to say that under no circumstances will there be a full currency Union. It has been a great tool for the campaign, as it focus' on the heads and not the hearts. The Heart felt vote will always be for an Independent nation, as its is more aspirational than more of the same.

However, why, as a person living in Southern England, do we care if there is a Currency Union. Scotland demands a seat at the Bank of England as its price. Fine, let is have one - after all the MPC is a vote of 12, Scotland having one is about right in terms of economic contribution. Scotland will not dictate the votes on interest rates.

Scotland too would have to sign up to strictures around public spending, Tory ones in times of a Tory Government and Labour ones in times of a Labour Government. That means they would have limited impact on their macro spending.

So in effect, nothing would really change economically for the Scots or have any real impact on the UK as it remained.

Currency Union does not really hold any big bad macro effects, except if Scotland went off the rails and tried to print its own money etc - something that even Greece could not do. Plus over time, the Scots would issue their own debt and so would have the markets act directly to help persuade a Scots Government of the nature of debt and spending.

As such, I think all the Westminster MP's are lying and in the end if the vote is Yes then the likelihood is there will be a Currency Union - not having one is unnecessarily spiteful and also probably against the terms of the treaty signed when the referendum was first agreed to.

Without a Currency Union the Scots economy faces a very uncertain and bleak future, that much is true.


BE said...

Why will English voters care? Because they can see what a disaster currency unions are at close quarters, perhaps?

andrew said...

"Without a Currency Union the Scots economy faces a very uncertain and bleak future, that much is true."
"The Scots economy faces a very uncertain and bleak future, that much is true."

There, ftfy.

Quite simply, the "rich 1st world nice place to live" future belongs to economies that are able to do as much of
(a) Be reasonably well run (not too corrupt, not too unequal)
(b) Command lots of valuable natural resource (oil)
(c) Command lots of valuable human resource (the city)

as possible.

Like it or not, looking round the world, "valuable human resource" tends to clump geographically into small(ish) areas.

In England we have (a) and (c)
(Comments on how bad our govt is elsewhere please)
In Scotland, whether or not they choose independence, they have (a) and (b) is fading away

In terms of the main point of the post, currency union may be possible, but the govt of whatever colour will need to explain to the citizens of England and Wales what the short and long term benefits are to _us_ of allowing the currency union to remain.
After all they are only 7.7% of the UK economy and as such don't deserve an entire seat at the table.
Stopping the tax subsidies flowing north will help reduce our structural defect without having to raise taxes or cut spending.
We wont have to listen the Scottish people explain how much better things would be if they had their own government.
Good luck to them.

CityUnslicker said...

BE - of course, the Euro is a disaster - but for Germany or for Greece?

In this sceanrio, the UK are germany, a weak country will be tied to us to help keep the Pound low.

Currency Union is least worst option for Scotland, just as it is now.

CityUnslicker said...

Andrew - one vote out of 12 is no real vote in practical terms though is it?

andrew said...

Yes and no

More fun if the reps of the MPC represented geographic areas and votes were weighted by the gdp % in the constituency.

You may find the reps for "not london" have a different view to "london"

BE said...

The Euro is a disaster for Germany as well. Why on Earth would English voters sign up to be Germany, constantly at risk of having to bail out our now-foreign-country neighbour? Scotland might on get a 1 in 12, say, influence on currency-union policy but we can see perfectly well across the channel that policy is almost impossible to enforce. You can set up as many stability pacts and fiscal pacts as you like, but the junior member will always be tempted to ignore or bend such rules.

No, currency unions do not work, so why should I, as a "southern English voter" want to sign up for one? Why should I, as a "southern English voter" give two hoots what happens economically to the Scots post-independence, any more than I give two hoots what messes the Dutch or Belgians or Italians get themselves into?

BE said...

Andrew I *hope* that the MPC already does not just set policy based on London conditions! The MPC should certainly now not be raising rates on the back only of London's apparent recovery. London is a very important part of the English economy, but we are still only a fifth of the English population.

hovis said...

Do the Scots really need a currency union? Could they not simply sterling-ise in the same way Venezuela is dollarised?

Hell they don't really need a Central bank, this would of course rely on their banking system being both sober, realistic and risk averse to attract investments. It would however be a refreshing change to remove such moral hazard. Obviously such traits are something the banks, especially Scots ones currently do not have.
So this would indeed cause short medium term pain.

Tangentially to oil: Saw some talk of one of the most northern oil fields (Orkney/Shetland way) having huge new finds. May be a red herring for algos and investors. Would be interesting if true.

Having iconoclastic leanings, I truly hope they vote yes for all our sakes. We wil then be forced to look in the mirror and accept who and where we are and where we want to go.

Jim said...

Surely the point is that in the absence of a currency union the rUK will gain virtually all the Scottish financial sector, as it decamps to London. Plus plenty of other businesses who want stability and don't fancy being the goose to plucked with higher taxes on businesses (which will surely come once the money gets tighter).

Thus in pure self interest the rUK should refuse a currency union and watch the money flow south. Whether or not that is the right thing to do is another issue. But as Scotland wants to act in its self interest (our oil etc) why shouldn't the rUK? Its the natural result of nationalism. Its all very well to say "We're not anti England we're pro Scotland", but the English could say the same, and hard luck to the Scottish if our decisions don't suit them.

I think politicians will have a hard time being generous to Scotland in the event of a Yes vote, voters south of the border won't stand for it, whether thats right or wrong.

john miller said...

Nobody should care whether the Scots continue to use sterling or not.

What is very important is that they do not have access to the Bank of England as the banker of last resort.

The Scots have always favoured governments that spend more than they can afford. In five years time, I don't want to see some of my taxes going to bail out the Jocks.

CityUnslicker said...

You all realise Ed Milliband will be PM when the bulk of the negotiations are going on. You do remember Tony Blair's epic giveaways to Europe?


I still think its a rounding error. The Lloyds and RBS's will move south anyway and what is left in Scotland won't matter, may as well let them use the currency will be Westminster meme - a nice, modern, happy divorce etc.

Also, please not the author, who is against currency unions, is also very pro-Yes which may or may not colour posts and positions during the month of September.

BE said...

If Scotland votes Yes, there will have to be an rUK general election almost immediately. Otherwise how could Scotland negotiate with the rUK properly? It would take about five minutes to push the relevant legislation through Parliament. Who on Earth can predict which party will do well under such a scenario?

andrew said...

as the MPC meetings are in london and all the MPC members are distinguished economists, I may be wrong, but have a feeling that they do not live in Preston, Fishguard, Aberdeen or Launceston etc.
The area you live in and the friends you have who live there inevitably colour your views.
If the MPC does not follow mechanical rules (if they did then I say why have an MPC and not a spreadsheet) then even with the best of wills they are human and will be biased.

If there is an election and you remove Scotland, the Cons win.
Not that that cheers me overmuch.

BE said...

Not necessarily, if the Con PM who staked so much on No has just lost. I think a snap GE will be pretty interesting.

Anonymous said...

CU: "Fine, let is have one .. "

Why? Does Panama have a seat on the Federal reserve? No, so if Scotland wants a currency union, well, she can go ahead and use Sterling on the same basis as Panama uses the US$.

Although, given that the £ sterling has been devalued by about 99% in a century, I really don't know what all the fuss is about?

Would you really want to hang onto the hull of the Titanic for safety?

andrew said...

We are pretty useless...

... but almost everyone else is even worse

MySlapDownName said...

If Scotland goes, the next thing will be the Euro vote which the 'Anti-' side will win.
England/Wales/NI will then leave the Eurozone - not the Euro, mind - the eurozone.

At this juncture at least 30% of the UK economy will disappear - Much of it to Dublin, Edinburgh and the Netherlands, where lets face it, the kids speak better english than the Essex types.

This would (will?) be a disaster for England. The hubris and bluster shown here is typical of the species and one of the reasons the Scots want to leave.

Scotland leaving will dictate the colour of UK politics for a generation with Labour unable to get a majority and the blue rinse/old colonel brigade controlling things.
England will wither on the vine of pensioners and pissed-in tweed pants.
If thats what you want good luck.
(Youre heading there anyway, but this will accelerate the arrival)

Clive said...

If only is were as simply as Sovereign debt. If Scotland was "Serlingised" (as opposed to "Dollerised"), the Scottish banks would have to move to a full reserve banking basis. Otherwise, they'd be able to create money in the same way as UK banks currently create money.

( is a good explanation of the issue).

Otherwise, a Scottish bank would be able to create new Pounds which would have to be backed by the Bank of England. The Bank of England would -- presumably -- not be allowed to regulate the new independent Scottish banks. So the only way that the independent Scottish government could ensure that the fractional reserve banking system was solvent would be to either keep the reserves ring-fenced in new Bank of Scotland (or the Scottish National Reserve or whatever they wanted to call it) or else demand full reserve banking in the banks themselves.

Good luck with that one, Scotland.

BE said...

The big "British" banks would have to move into the rUK jurisdiction *anyway*, irrespective of what mickey-mouse monetary scheme Salmond dreams up next time he's asked. There is an EU rule about it. So even if Salmond gets his way on the £, the banks with the bulk of their customers in England would have to move to England. I'm sure the finance workers in Edinburgh and Glasgow will approve...

So on the 19th we will see a massive flight to safety, and huge redundancies in the financial sector. As Clive says, Scotland will become Austrian overnight, with all the fun that will entail.

I am sure that in the longer run Scotland will prosper but the first few years won't be a walk in the park. I am looking forward to watching it unfold.

CityUnslicker said...

Also of note, the EU has said Scotland cannot setrlingise. It's choice is currency union or Euro - very unappteising if y our a Scot but I say go for it Scotland.

I like the commenter who argues against 700 years of history and thinks business will flee London for Dublin and Edinburgh. That's hilarious - both bankrupt and corrupt Countries. At least if you had said Frankfurt there would be an argument.

But I have been to Frankfurt, so there isn't. There are many reasons London if effectively the capital of the world, being in the EU is a one of them, not the defining one. The defining one is property rights, weaker everywhere else than the UK.

BE said...

Yes quite right CU. Salmond's plan to be in the EU while using the £ has been squashed. It will be very amusing to see the most pro-EU bit of the island outside it and not allowed back in until it gets its own central bank. If Scotland reneges on the debt it will be even more of a pariah.

I hope the EU flag is flown at the crossing points along Hadrian's wall. For the first couple of hundred years we should make the crossing fairly tortuous just for the sake of it. Perhaps introduce an annoying requirement to keep a warning triangle and high-vis gilet in the boot. I trust contingency plans are in place (by the SNP) to stop the exflux of Scots - perhaps a Gretna Wall?

Budgie said...

BE, Hadrian's wall is well inside England, particularly in the east, north of Newcastle. Indeed the Wall would have been even further into England if the Scots (from Ireland, who had conquered north Britain) had not also stolen land from England (mainly from what had been the Kingdom of Northumbria) as well as annexing the Kingdom of Srathclyde, and numerous islands in the years between about 1040AD and 1472AD.

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