THE odd thing about the debate raging in the Scottish National Party about the future currency of an independent country is that it is happening at all. The civic nationalists who won independence for the central European and the Baltic states in the 1990s hardly gave a thought to currency. It doesn’t figure in the American Declaration of Independence. There were other priorities – like shaking off foreign domination.
All credit to the SNP for thinking ahead. However, speculation about optimal currency arrangements after independence is, well, precisely that. Scotland has yet to decide that it even wants to be independent, and debating the minutiae of monetary policy is not going to win many converts. Whatever Nicola Sturgeon says today about the new road map to Scottish independence, we know it’s not going to happen for some time. Not until the dust has settled on Brexit, at the earliest.
That leaves a host of monetary imponderables. What will Scotland’s relationship be to the UK? Will it be broadly confederal, as envisaged in the 2013 Independence White Paper, or totally separate? Will the UK still be in something like a single market with the European Union? Will Scotland have a single market with the UK, or will there be a hard border at Gretna? Will the UK Government make life difficult for an independent Scotland, or might Westminster offer incentives to keep Scotland in the broad UK financial orbit?
Then there’s the euro, which was hardly mentioned in last year’s Sustainable Growth Commission Report, the SNP’s bible on managed independence. To join the euro requires, in theory at least, the possession of an independent currency. However, the EU would likely be so keen to ease the path of Scotland into the EU that it could make the terms for joining very attractive. Terms Westminster might want to match, who knows.
Everyone seems to think that an independent Scotland would be a bit of a basket case, like Greece in 2012, or Ireland in the 1920s, or even Venezuela today. This is carrying national pessimism, and Unionist propaganda, too far. Greece and Ireland were economically backward countries who joined fixed currency arrangements with more productive neighbours. That left them with an over-valued currency, which made their exports uncompetitive, and the state burdened with debt it couldn’t inflate away.
Scotland is a wealthy country with high earnings and labour productivity, bankable natural resources and a sophisticated financial sector. Indeed, the problem for an independent Scotland, were it to introduce its own stand-alone currency, might be that the currency appreciates too rapidly, making Scottish exports uncompetitive the other way, rather as happened to Denmark in the 1960s.
International finance is aware of the 20 billion barrels of known oil reserves in the North Sea, even if Unionist politicians don’t talk about it in front of the children. Scotland is emerging as a world leader also in renewable energy, possesses formidable intellectual capital in her world-class universities and has a flourishing tourist industry. Scotland also has, by the by, a commodity that accounts for nearly a quarter of all UK food and drink exports: whisky.
The fear that Scotland, even with the spending deficit left by the Barnett Formula, would be seen as a bad financial bet is almost certainly false. This isn’t Venezuela or Nigeria, or Ukraine or Greece. Scotland’s posture towards the international financial markets should be one of strength and confidence, and not fearful insecurity.
And while a stand-alone currency might give maximum financial control, a currency union should not be dismissed as incompatible with independence. France and Germany are in a currency union but they are still independent countries. There is a reason why small countries like Slovakia, Slovenia and Latvia, are enthusiasts for the euro, even though it diminishes national sovereignty. This is because it makes for currency stability and ensures a level playing field.
However, to return to my initial argument: talking about currency is getting the financial cart before the constitutional horse. There’s a good practical reason why most countries seeking independence betray a studied vagueness about currency arrangements: they just don’t know how things are going to pan out.
Read more: People more open to case for independence over Brexit, says Nicola Sturgeon
When the Czech Republic and Slovakia decided to go their own ways in the Velvet Divorce in 1993, they thought initially that a currency union would make sense. It rapidly became clear that it didn’t. So they split in a fairly improvised way – at one point sticking stamps on bills to indicate which country they belonged to. But it worked. After initial disruption – and let’s be honest, any financial separation involves disruption – Slovakia powered ahead, with a devalued currency and flat taxes. It has been one of the fastest-growing countries in the EU ever since.
Slovakia’s is not a course that social democratic Scotland would probably wish to emulate, but then it wouldn’t have to. Scottish independence, if and when it arrives, will anyway be a process not an event, and will take place over a number of years, perhaps decades. When Australia became functionally independent, along with Canada, following the Statute of Westminster in 1931, it pegged its currency to the UK pound, and then evolved its own.
The row in the SNP is essentially about austerity, not the merits of an independent currency. The First Minister has broadly accepted the Unionist argument that Scotland would be burdened with a £13 billion deficit upon becoming independent, and that it would have to reduce that by curbing public spending for a decade. Her critics, led by the former MP George Kerevan and the Campaign for an Independent Currency believe that Scotland would be chained to the Bank of England and that the spending constraints would be similar to George Osborne’s in 2010. But even Mr Kerevan accepts that adopting a new currency would take time – about five years.
It is commendable that the SNP should be thinking about the mechanics of currency, but it can’t do so in the abstract. There are many ways to skin the currency cat. Once there is a national consensus for separating from the UK, forging a currency consensus will be very much easier.
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