George Osborne dropped a Valentine nasty into Yes Scotland’s letter box on Thursday, ruling out any shared currency zone after independence. The other UK parties endorseed this lock out, creating a dramatic escalation of the currency war that carries risks for both sides.
Let’s be clear what this means. The rest of the UK (rUK) will unilaterally erect customs posts and force everyone to change money when they cross the Border. This would damage trade and free movement of people. It could mean sour-faced customs police nosing around in your car boot; tariff barriers, even. It would be a vindictive and self-destructive act that would damage England’s balance of payments and increase the cost of UK national debt.
And, it probably will make anxious Scottish voters reluctant to vote Yes for fear of economic chaos. The Chancellor is trying to make independence an offer they can’t accept, though a referendum held under duress would leave a reservoir of bitterness. This may well go down in Scottish folk memory as coercion by the UK political establishment, an act almost of economic warfare. So much for Section 30 of the Edinburgh Agreement, which was supposed to ensure respect.
Reuters reported the story as “Britain to tell Scotland: Leave the UK and Lose the Pound”. A historical howler as Britain was, of course, a joint creation of Scotland and England after a voluntary union. Britain isn’t in a position to tell Scotland anything, and the pound is common property.
This is why the SNP say that, if Scotland is “denied” the use of the pound, an independent Scotland would no longer be liable for servicing the debts of the UK Treasury. If Scotland was locked out of its share of the monetary assets represented by the Bank of England (founded by a Scot), the UK could not expect Scotland to assume its liabilities. Scotland’s share of this amounts to some £6 billion a year, almost as much as the value of North Sea Oil.
This is called “default” by Alistair Darling, chairman of Better Together, and it might look like that. But it would really be a kind of default in reverse, as the Scottish Government insists it is fully prepared to share the UK national debt as part of a currency union. This is not Ireland in 1933, when the Republic unilaterally ceased paying its negotiated share of the UK national debt and provoked economic war. It is the UK that is playing economic hard ball.
Serves you right, say the Unionist bloggers and tweeters who could hardly contain their glee. The SNP shouldn’t have started this war by trying to become independent. But Britain, remember, is still supposed to be a democracy, and if the Scots choose to govern themselves that is surely a matter for them. A referendum held with a gun to the head is not democracy. It’s the politics of Dirty Harry: go ahead punk, make my day.
I still doubt if George Osborne is serious about pulling the monetary trigger. There would be cost to England of a disorderly disintegration of the UK, and not just in terms of debt. Companies that straddle the Border such as Sainsbury’s would have to put up with the administrative hassle, and cost, of dealing in two currencies. The UK’s balance of payments would be significantly damaged by the loss of Scottish exports.
Unionist economists such as Professor Brian Ashcroft accept this, though he argues that the damage would be substantially less than the £40 billion quoted by Nicola Sturgeon
An acrimonious break-up, and a reverse default, would tarnish the whole UK with an image of instability. Markets don’t like border posts and currency wars. Such disruption would likely lead to a weakening of the rUK’s credit rating and an increase in borrowing costs in England, especially with RBS, and its toxic balance sheet, being forced to relocate to London. The presumption of the UK political establishment is that Scotland would be a basket case economy like Greece, in need of frequent bail-outs from London. This is by no means certain, as (perhaps surprisingly) the right-wing Adam Smith Institute pointed out last week.
Relieved of the burden of most UK debt, and with substantial natural resources, an independent Scotland might be more like Switzerland than Greece. Scotland is, as the National Institute of Economic and Social Research reported last week, already one of the wealthiest countries in the world with a healthy balance sheet and lower debt than the UK. Scotland’s GDP per head is higher than the UK’s. Even with an ageing population and volatile oil revenues, Scotland might still be an attractive place to invest.
And, of course, Scotland can still use the pound, whatever George Osborne says. Sterling is an international reserve currency anyone can use. All the Chancellor is saying is that his Government would make life as difficult as possible for Scotland to use it. The Scottish banks would not be backed up by the Bank of England as “lender of last resort”, to use the jargon. But Osborne might be doing Alex Salmond a favour here.
He may have relieved Scotland of a monetary straightjacket under which interest rates are set by the Bank of England and borrowing limits set by the UK Treasury, which would be likely in a continuing monetary union.
The killer question for the First Minister is supposed to be : “Where is your plan B?” But an independent Scotland would have almost as many currency options as letters in the alphabet. Norway has its own currency, is outside the EU but part of the single market and does very well. So does Denmark, which has its own currency but is in the EU and in the single market.
Latvia and Slovakia have recently joined the euro, which looks likely to be around for a while. Iceland is recovering well from its banking crisis and isn’t a member of anything. Scotland’s currency might float against the pound for a couple of years and then join a new eurozone.
The most desirable and logical solution, as Mr Darling famously said on Newsnight, would be a continuation of the UK currency zone, at least for the time being. But, as he rightly pointed out, this assumes that the rUK would go along with it. It assumes there would be an amicable separation, with the Bank of England as the relationship counsellor. But the UK is saying: “I’m taking the money, the house, and the kids and you’re on your own.”
I doubt it will come to divorce because Scots will see the cost of voting for independence, in Westminster’s current belligerent mood, being too high. Scotland is a small country bolted on to a much larger country which is clearly prepared to destabilise an independent Scotland’s economy. But a No vote built on the back of this kind of rough wooing is not going to be a positive affirmation of the Union. It will be a fractious and unhappy marriage of partners who have been together, too long.