Many had expected that the Growth Commission’s report would deliver much needed information on the kind of currency regime that would be fit for purpose for an independent Scotland.
Unfortunately, the report simply revisits the sterlingisation regime proposed in the 2014 independence referendum with all of its deficiencies.
What are these deficiencies?
First, in deciding to effectively fix the currency the report is silent on how an independent Scotland would deal with the kind of massive economic shock created by the dramatic fall in the price of oil.
Read more: Independent Scotland can rise above Brexit-style row, report insists
This would have been even more devastating without the fiscal coinsurance that exists within the UK’s political and monetary union.
To replace this, and to robustly address future shocks, be they oil or otherwise, an independent Scotland would need some exchange rate flexibility unless it is prepared to undergo an internal adjustment of Greek proportions.
Second, is the chosen implicit assumed one to one relationship between the Scottish currency that could exist post-independence and sterling the right one?
Undoubtedly not.
Read more: Alistair Carmichael: Growth Commission is all about the economy and that’s why it is still a ‘No’
Most central banks devote a considerable resource in tracking the ‘fair value’ of their currency before and after pegging but there is no discussion of that aspect in this report, which is a very serious deficiency indeed.
Third, the proposed arrangement relies on foreign exchange reserves – sterling – to be the macroeconomic shock absorber.
But it is extremely doubtful that the inherited level of reserves, given a fair share of Bank of England reserve holdings - around £12bn - will be sufficient to serve that purpose.
For example, the best-known example of a dollarisation programme, on which sterlingisation is based, is that of the Hong Kong experience.
The Hong Kong monetary authority runs with foreign reserves of around £300bn, a considerable multiple of what an independent Scotland is expected to have.
In order to create a credible level of reserves, conservative fiscal balances would need to be generated and the proposed 3 per cent fiscal deficit would need to be flipped to a surplus of anything up to 10 per cent of GDP.
This would of course imply massive spending cuts and or large tax hikes which would be completely unpalatable to the Scottish public and outweigh any gains from independence.
At the end of the day the absence of an effective macroeconomic adjustment mechanism in this proposal will be non-credible to international capital.
A currency crisis is the last thing that a newly minted independent government needs. But that is what this proposal will generate.
Ronald MacDonald is Professor of Macroeconomics and International Finance at Glasgow University
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