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The question is not whether the Scottish government will be able to twist England's arm (perhaps by threatening to walk away from the UK's public debt) so as to be allowed to stay in the Sterling zone. This is the wrong debate to have. The real question, that is already surfacing, is whether Scotland should want to share the Bank of England, as the recent White Paper sets out to do. The question for the people of Scotland is: If political union must precede a successful monetary union, as the Eurozone crisis has demonstrated so vividly, does it make sense to want to preserve a monetary union prior to dismantling a political union? The answer is unequivocally negative, turning the White Paper into unionism's unwitting ally.

Suppose for a moment that London bows to Scottish demands that the two countries share the Bank of England, appointing a governing body of Scottish and English central bankers in proportion either to population sizes or to national income shares; and even renaming it the Bank of England and Scotland (BoE&S). Presently, following the Credit Crunch, the Bank of England pursues energetically a policy of quantitative easing, supporting Westminster with copious purchases of Treasury-issued gilts. Once Scotland begins to issue its own bonds, as an independent country must do, the question is: How will the BoE&S decide on the mix of gilts and Scottish government bonds that it will purchase? Is this matter to be left to the discretion of the English-majority governing board, thus rendering Scotland's independent fiscal policy a sham? Or will some fixed ratio be devised, again limiting Edinburgh's fiscal leeway?

Moreover, when the current `unconventional' monetary policy comes to an end, with interest rates rising to `normal' levels, how will this `tapering' decision be reached? The English governors will always vote in favour of higher interest rates in tune with the London-based economy and its tendency to create real estate and financial bubbles. Unlike in the European Central Bank's governing board, where no country can ever have an absolute majority, in the BoE&S Scottish governors will be consistently out-voted, the result being Scottish interest rates that are permanently too high for Scotland. With Scottish growth thus artificially restrained, Edinburgh's fiscal policy will have to remain contractionary so as to meet the European Union's deficit and debt limits, if the White Paper's commitment to remain part of Europe is to be fulfilled. Without its own central bank to back its bonds, the Scottish government will be constantly threatened with rising bond yields; a scenario that bodes ill for a nation thirsty for national sovereignty.

Further to the political argument for a new Scottish currency, there are formidable economic arguments in its favour; arguments that do not obtain in Greece's case.

First and foremost, Scotland, unlike Greece, has its own banknotes. This may well be an historical curiosity but, nonetheless, it could prove hugely beneficial for an independent Scotland. Presently, three Scottish banks issue Scottish pounds under an agreement with the Bank of England which limits the quantity of printed money.[2] Upon independence, the Scottish government can commit to maintaining (say, for two years) the same rules except that the control of the three banks' note issues is transferred to a Scottish Central Bank which commits to maintaining a currency board that allows for a seamless transition to a free-floating Scottish pound (within two years). Unlike in the case of a Greek abandonment of the euro, in Scotland there need be no bank closures (as the Scottish notes are already in circulation), no ATM disruption, no re-writing of short and medium term contracts and no fear of bank runs. Indeed, the currency in people's wallets will be exactly the same as now.

Turning to the issue of public debt, another difference with Greece (which will default de facto the moment it leaves the Eurozone) is that Scotland does not have a public debt. Or, to be precise, it will have whatever debt it inherits from the United Kingdom as a result of a post-referendum negotiated settlement between London and Edinburgh. The SNP's misguided commitment to staying within the sterling union is forcing Mr Alex Salmond to sacrifice the debt issue, using it as a bargaining chip for securing the continuation of a lopsided currency union (rather than issuing a new currency in order to minimise the amount of UK debt shouldered by an independent Scotland).



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Sep 9th, 2014 at 12:39:11 PM EST

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