Answering your questions on currency

How much weight should we give to George Osborne’s Speech and the UK Treasury Report?

Professor David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, put things in the right perspective: "There are clearly things to be worked out but a lot of this sounds like political posturing rather than economics.

"It is hard to argue that in fiscal terms, under this union, Scotland could have possibly done worse than UK Chancellor George Osborne has done and the evidence is that actually Scotland has been doing better. So we have to get the economics right."

Earlier this year, the Fiscal Commission Working Group – set up by the Scottish Government – published a comprehensive analysis of the currency options for an independent Scotland.  In contrast to the Treasury report, the work of the economists on the Working Group is independent.  Not only that, the economists are internationally renowned – including two Nobel laureates.

They also appear to have been endowed with an ability to see into the future, warning that: "it is important to acknowledge that political considerations will play a role and may cloud pre-referendum comments and policy statements. However, these are likely to differ from the actual decisions taken post-referendum when agreement is likely to take place where there are common interests".

That proved 100% accurate today. George Osborne today was adopting pre-referendum posture.  Last week, his Chief Secretary to the Treasury, Danny Alexander, at least paid passing reference to the post-referendum position: "I have no doubt that both the UK and Scotland would – if it came to it – negotiate Scotland’s independence in a responsible manner"

But why would the remaining UK want to agree a Formal Currency Union?  

According to the UK report, the case for the remainder of the UK agreeing a formal currency union is “unproven”.  Which suggests they can’t come up with credible arguments against it.

In fact, there are several very strong reasons why it would be hugely important for the remainder of the UK to seek such a currency union.

The Working Group explain: "From the perspective of the UK - if there is a vote for independence - the Working Group believe that this framework would be to their benefit. It would, for example, provide a consistent and transparent framework to manage the transition process. The UK would also retain an integrated market with a key trading partner. As approximately 10% of the existing UK economy (roughly the size of the entire financial services industry in the UK), Scotland would remain one of the largest trading partners of the UK economy. There would be particular advantages for the UK in areas such as energy and financial services.

“Moreover, the model proposed for monetary policy, financial stability and fiscal policy offers fully engineered frameworks in key areas of interest to the UK. For example, the proposals for financial stability would ensure that major financial institutions based in Scotland and operating in the rest of the UK would be subject to similar levels of oversight and scrutiny (and vice versa)".

Additionally, Scotland’s continued use of the pound would make a massive positive contribution to the Sterling Zone’s balance of payments. For example, Oil and Gas UK estimate that North Sea oil and gas exports, the vast majority of which originate from Scottish waters, boosted the UK’s balance of payments by £40 billion 2011-12.

Even today’s Treasury report grudgingly acknowledges: “…if such a union could be agreed, Scottish households and businesses would continue to use sterling. There would be benefits for both Scotland and the rest of the UK from continuing to use the same currency and keeping transaction costs low, but it would also create significant economic risks”.

What are those risks?

Essentially, George Osborne is concerned that for some reason Scotland would adopt reckless economic and spending policies that undermine the currency union.  

Of course, there is absolutely no reason to suspect a Scottish Government would wish to embark on such a course.

We do not seek the powers to behave recklessly!  

We seek powers to tackle key challenges to the Scottish economy, such as growth rates that are below international average.  We want powers to encourage more business start-ups and to incentivise commercial research and development.  We also want the powers to pursue an alternative path to George Osborne’s austerity agenda – an agenda that is actually stifling growth and depressing tax receipts as well as causing untold hardship for households across Scotland, including some of our most vulnerable citizens.     

That’s why nobody is arguing against the creation of fiscal rules setting out certain limits on how the Governments of the Sterling zone could behave.  Both the Treasury report and the Fiscal Commission report accept the need for such rules.  These rules are designed to promote economic policies that will ensure financial stability.  

But what’s the point of independence if we’re subject to oversight from London?

As explained above, the fiscal rules are designed to promote stability and for that reason would be acceptable.  Within that framework, independence offers us key powers to tackle weaknesses in the Scottish economy that Westminster can’t or won’t  address and, more fundamentally, to choose different policy decisions on tax and benefits than those being imposed by George Osborne.

As the expert economists on the Fiscal Commission Working Group stated: "Within this macroeconomic framework, fiscal policy would provide the key new levers for the government to grow the economy and to tackle challenges in Scottish society and Scotland’s economy. In addition to aligning spending priorities and policies to the unique circumstances of the Scottish economy and the preferences of the people of Scotland, opportunities would exist to put in place new tax and economic regulatory systems."

Professor Blanchflower is of the same opinion:  “Independence within a currency union would represent a substantial increase in the economic responsibilities of the Scottish Parliament. A currency union would provide the full flexibility to vary tax and spending decisions to target key opportunities and challenges in Scotland – powers that are currently unavailable to the Scottish Parliament.

“George Osborne would be better off revisiting his misguided and failing policies for growth rather than scaremongering to the people of Scotland.”

Wouldn’t we also be giving up control of Monetary Policy?

No.  Monetary policy is not decided politically, but by the independent central bank.  Scottish politicians do not control monetary policy decisions.

Instead, economists with a range of expertise meet as members of the Bank of England’s Monetary Policy Committee to make decisions on interest rates and currency in the interests of the UK economy as a whole.  There is no reason why, as suggested by the Fiscal Commission Working Group, the central bank would not wish to continue to benefit from the input of an expert in Scottish economic affairs when making decision about the Sterling zone.  The Bank would continue to set interests rates in the best interests of price stability in the Sterling zone, just as it does now, free from interference by governments.

Of course, despite its name, the Bank of England is already the central bank for the whole of the UK, and is owned in common by taxpayers in each of the four countries of the UK.  The proposal of the Fiscal Commission Working Group would therefore see the shares in the bank allocated according to population, or the size of each county's economy - and agreement reached on input into appointments to key decision making committees.  As both the Treasury paper and Fiscal Commission Working Group state, the precise arrangements for membership of committees and supervision of the Bank would require to be negotiated.  

Won’t This Lead to a Eurozone Style Crisis?

Comparisons with the Eurozone are a red herring.  The Eurozone is in crisis because too many vastly divergent economies were shoe-horned into one brand new currency.  Scotland and the rest of the UK already share the currency and the links between their economies mean that on independence, the area would form an “optimal currency union”.  

Furthermore, in the words of the Fiscal Commission Working Group: "It has been claimed that a model of monetary union poses Euro Area style risks to Scotland.  However, the proposed framework summarised above is quite different. It contains a number of mechanisms which overcome the design problems of the initial Euro Area model. It starts from an existing shared currency, and incorporates key elements of fiscal and financial stability policy, underpinned by two economies which are structurally, cyclically and institutionally more aligned than the members of the Euro Area."

Alternatives

For all these reasons, we should dismiss the scaremongering of George Osborne and his attempts to undermine the very detailed and comprehensive proposals of the expert economists on Fiscal Commission Working Group for a formal currency union.

That said, there are other options open to an independent Scotland.  Some supporters of Yes argue that in time a new Scottish currency would be a logical step.  For example, the Scottish Greens have urged the Scottish Government to keep an open mind about moving towards an independent currency, but have not ruled out supporting a Sterling zone as a short term transitional arrangement.  

Their co-convenor, Patrick Harvie MSP, responded to the UK paper by saying: “George Osborne is more interested in scaring people ahead of the referendum than an honest assessment of the options after it. In the event of a Yes vote both sides would need to recognise the mandate given by the people, and settle down to the real negotiations. Scotland's hand in those negotiations would be strengthened if we did the groundwork on our own currency so we keep it as a realistic medium-term option.

"Osborne's economic credibility is in tatters and now he's attempting to wage a phoney war by suggesting we're doomed unless we stick with the existing arrangements - arrangements which fail to reflect our needs and aspirations. If Scotland votes for full control of our own affairs it is reasonable to expect our economic priorities to diverge from the rest of the UK, so we would be wise to keep our currency options open."

Conclusion

The Fiscal Commission – of eminent independent economists – has published a blueprint for currency arrangements after independence.  Its proposals are designed to secure the right conditions for trade, commerce, job creation and efforts to tackle inequality.  To that end, the arrangements seek to secure low and stable inflation, currency stability, a strong balance of payments position, sound public finances, and financial stability.

Retaining the pound as part of a formal monetary union will best promote continued trade to and from the rest of the UK and beyond. The group of experts expressly designed their proposals so that they would be as attractive as possible not only for Scotland but for key partners including the UK and the EU.  In particular, the proposals would be in the economic interests – in terms of trade, competition and financial stability – of the UK post-independence.

Topics: 
Economy, Public finances

Should Scotland be an independent country?

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