Mike Hedges asks how long a shared currency would last if Scotland chooses independence
Countries splitting up has happened throughout history – some have been amicable, others less so. Often the issue of currency plays a part in determining the nature of the split. We have a fairly recent example of an amicable divorce by two countries when Czechoslovakia divided into the two new countries of Slovakia and the Czech Republic. Initially the old Czechoslovak currency, the Czechoslovak Koruna, was used in both countries following the dissolution of Czechoslovakia on the 31 December 1992.
|
Scotland Votes
Tomorrow: Alan Trench suggests ‘Devo More’ could be a halfway house between the status quo and independence
|
However, by the 8 February 1993, the Czech Republic and Slovakia had adopted their own national currencies in the form of the Czech Koruna and the Slovak Koruna. At the beginning, the currencies had an equal exchange rate, but later on the value of the Slovak Koruna was as much as 30 per cent lower than the Czech Koruna. The Czech and Slovak joint currency lasted less than 40 days. Why would anyone expect a British and Scottish joint pound to last any longer?
In 1922, when the Irish Free State broke away from the rest of the UK it had its own had a currency, the Irish Punt. During the days of fixed exchange rates this was pegged to the pound sterling. Following the advent of “floating” exchange rates, the value varied against the pound sterling until Ireland entered the Euro in January 2002. In the days of fixed exchange rates it was relatively easy to peg one currency against another but it meant Ireland relinquished control over the value of its currency to the bank of England. Under floating exchange rates a currency will reach its own level and following the end of fixed exchange rates, at various times, the Irish punt was worth more and less than the British pound.
The most recent split was when Sudan split into Sudan and Southern Sudan. Sudan has the Sudanese pound whilst South Sudan has the southern Sudanese pound as the official currency of the Republic of South Sudan. It was approved by the Southern Sudan Legislative Assembly prior to secession on 9 July 2011 and it was introduced on 18 July 2011, replacing Sudanese pound as the national currency but initially at the same value. Sudan’s president announced a new currency, a day after newly independent South Sudan confirmed it would do the same, as both states worked to disentangle their economies after the split. It was considered crucial the two countries coordinated their currency launches closely, to avoid future disputes between the two former foes. South Sudan’s Central Bank governor Elijah Malok told Reuters that “the key issue was how the south would now redeem up to 2 billion old Sudanese pounds still circulating in its economy”.
Am I the only one who sees the same issues arising between an independent Scotland and the United Kingdom of England, Wales, and Northern Ireland, the UK?
For Scotland, the alternatives seem to be to have a Scottish Pound or for Scotland to enter the Euro. However, we know that enthusiasm to enter into the Euro has declined since the debt crisis that has occurred in several European nations.
New members of the European Union also have to join the Euro and adopt tougher European Treaty obligations on border controls, crime and security. Even if Scotland was to join the European Union, it would have to join on the terms offered to new members and not rely on the current agreement reached between the UK and EU.
Now let us assume that, despite everything we know, Alex Salmond is correct and Scotland can continue with the pound sterling. This would mean the value of the currency in the remainder of the UK would be affected by decisions over which the Westminster chancellor would have no control. Surely the simplest and easiest solution would be to allow Scotland to have the pound sterling and to create a new currency, perhaps called the British Pound or UK pound that would obviously start at parity with the old currency but then the currencies would find their natural levels. Almost certainly, as happened between the Czech republic and Slovakia they would have have different values very quickly.
So whatever occurs the most likely, I would say near certain, occurrence would be that the two independent nations would have different currencies.
So much “Doh!” in this.
For a start, you aren’t comparing like with like. There is a considerable difference between the global significance of Sterling compared to the Czech/Slovak Koruna or Sudanese pounds. There would therefore be far more pressure internationally to ensure that Sterling remained stable. This would go a long way to dampen down, if not eliminate, the fluctuations and disparities referred to.
“In 1922, when the Irish Free State broke away from the rest of the UK it had its own had a currency, the Irish Punt.”
No it didn’t. It didn’t have its own currency for another six years. And the reason why parity was ended was that the sovereign government of the Republic decided in 1978 to join the ERM whilst London decided to stay out. This was a decision that the Irish government took because they saw it as in their national interest.
“Am I the only one who sees the same issues arising between an independent Scotland and the United Kingdom of England, Wales, and Northern Ireland, the UK?”
Far from it; but it doesn’t follow that you or they are right. See what I said above about the global significance of Sterling as to why those same issues would be dealt with in a radically different way.
“New members of the European Union also have to join the Euro and adopt tougher European Treaty obligations on border controls, crime and security.”
Irrelevant (see below). Also, ‘new members’ only have to commit to joining the Euro ‘at some unspecified point in the future’. No timetable is set, and all would depend upon the poisition taken by the government of the accessor state.
“Even if Scotland was to join the European Union…”
Scotland wouldn’t ‘need’ to ‘join the European Union”, it would continue to be a member, despite the comments of Mariano Rajoy (which in any case were aimed squarely at the Catalans, and so were solely for internal consumption). If independence really did mean exclusion, then wouldn’t the same apply to those parts of these islands continuing to be ruled from London? After all, the ‘United Kingdom’ is essentially an Anglo-Scottish construct, which would therefore cease to exist if one of the ‘Kingdoms’ decided it didn’t want to be ‘United’ anymore.
But legal niceties aside, does anyone seriously think that the EU would kick 5 million existing EU citizens out? The people in Brussels and Strasbourg – whatever they may say for domestic political advantage – are nothing if not realists and, like with Mark Carney’s remarks on currency union the other day, would take the view that they would try to make things work as smoothly as possible in the transition to Scotland’s full membership of the EU. It would be in no-one’s interests – not even London’s – to complicate things beyond the bare minimum. Hence, pace Snr. Rajoy’s remarks, representatives from both the Danish government and the European Commission itself has stated that they so reason why it should be otherwise.
Scotland already meets all the key requirements for membership, as it already conforms to EU regulations and the ‘acquis communitaire’. So what valid reason would there be for kicking it out or making it unduly difficult for it to get back in again in the highly unlikely event of it being ejected?
Finally, and most importantly, decisions regarding which currency to use would ultimately be a decision for a sovereign Scottish government, elected by the sovereign people of Scotland, and acting in the perceived best interests of that country, something which is regarded as completely normal everywhere else on this planet. If that means that Scotland ends up with Sterling, the Euro or the ‘Poond’, than that is their choice as a sovereign nation. Would that we had the same choice.
There has been no precedent among EU member states such as would occur if Scotland became independent. Mike asserts, and it is simply his assertion, that Scotland, whose five million population are already EU citizens, would be treated as if they no longer are, and be treated as if they were new applicants.
This particular scare story has been bandied about by unionists for the last eighteen months or so. Labour politicians have a vested interest in retaining the Union as presently constituted. Their party would be severely handicapped as far as gaining a majority at Westminster is concerned without the Labour contingent from Scotland. This has to be borne in mind whenever they comment on the issue.
As far as currencies are concerned, I’m not qualified to comment. However, Ireland’s punt was pegged to sterling for a great many years. I don’t know if that was a good or a bad thing for Ireland at the time. It makes sense to me, at least initially, that Scotland retains sterling as a currency as it would preserve stability there as well as in the rUK during the period of transition. It would be for the Scots (and also the rUK) to decide how long they wanted to continue with the arrangement thereafter.
Just because someone who is committed to Scottish independence states something it does notmeans that all their assertions are correct.
Scotland can pick its own currency so if it chooses the American dollar there is nothing the USA can do about it.
If Scotland leaves the UK it would no longer be part of a member state.
Notice no examples of countries splitting up and keeping the “old currency”
The biggest question is will Scotland with its vast oil reserves continue to prop up sterling or will they let it crash. Which is pretty much what was said in the McCrone report decades ago but was hushed up by Mike’s party.
Fortunately for Scotland they have seen through the lies of the Labour party.
As Mike Hedges says, Scotland can adopt any currency it likes. The question is will Scottish banks have access to the London interbank market and will the Bank of England act as their lender of last resort? If it agrees to do so, there is a currency union and the Bank will no doubt set conditions governing Scottish fiscal and regulatory policies. If the Bank does not so act, the Scots will have to create their own central bank or currency board and it will have to maintain currency reserves of sterling to back the Scottish pounds in circulation. That is generally a viable approach though it still means interest rates will have to be the same or slightly higher than in England. But the big problem then is the size of the balance sheet of banks currently registered in Scotland. Their assets and liabilities are a multiple of Scottish GDP and without the backing of the Bank of England they would be a substantial risk to Scottish financial stability – similar or worse to the former situation in Iceland. Perhaps that would be solved by one or more of the Scottish banks opting to move their registration to the rump UK.
GH
“Perhaps that would be solved by one or more of the Scottish banks opting to move their registration to the rump UK”
That would be an advantage to iScotland, given the continuing huge losses made by RBS, most of whose operations are outwith Scotland.
Gerald Holtham is right that there is no reason why the Scots cannot in principle use the Bank of England pound after independence. There are countless precedents of states using a currency controlled outside their borders. Historically it may have been the norm. Even today the US dollar is the de facto currency in many parts of the world – as the pound used to be. Indeed, the Scots would be free to use bitcoins or commodities or whatever other trading medium they chose. They simply need to understand that, if they do so, they will lose all right and ability to use control of currency as an economic tool. In an age of ‘independent’ central banks and common currencies, we are supposedly moving in that direction anyway. Whether or not it is a good thing if fiat money is dying out, an independent Scotland that either keeps the pound or adopts the euro needs to be clear that it is giving up one potential economic lever.
Yes, Scotland will not have monetary independence whether in a currency union or using sterling on its own via a currency board. A large bank decamping would solve one problem but the Scots could lose employment as a result. RBS, for example, apparently employs some 3,000 people in its Edinburgh head-quarters. No rose without a thorn.