The UK Government and an independent Scotland: taking a currency union off the table
February 14, 2014 1 Comment
The announcement by Chancellor of the Exchequer (and Danny Alexander and Ed Balls) that the UK Government is not prepared to establish a currency union with Scotland for use of the pound in the event of Scottish independence (see also BBC News coverage here) is a serious blow to aspirations of the SNP for a form of ‘independence lite’. The Chancellor’s speech is available here, and the Treasury analysis – the eleventh paper in the ‘Scotland Analysis’ series – on which Osborne drew in his speech is available here.
The logic of ‘independence lite’ was that it would avoid disrupting many key symbolic and economic ties between an independent Scotland (iScotland) and the remainder of the UK (rUK), so comforting swing voters about the limited scale of the risks of independence. Those risks are real; think of how attractive Scottish investment trusts and insurance companies look if the complexities and exchange-rate risks of using a different currency are introduced into the equation, for example. But this shift in the ground also emphasises a number of key issues about the implications of a Yes vote, and what would happen after it.
The first problem – which is particularly the case with the idea of a currency union, but applies to many other important issues – is the asymmetry of interest. A currency union is central to the way the SNP has formulated its model for independence. (That view can be contested, of course – whether by the likes of Jim Sillars on, essentially, autonomy grounds, or by Angus Armstrong and Monique Ebell on economic ones, relating to the flexibility of economic policy instruments and the implications of a debt burden.) But it is of marginal interest or benefit to rUK at best, poses a serious risk at worst, and concluding that the risks of it from an rUK point of view exceed the benefits is a reasonable judgement to come to. This isn’t the only issue where iScotland has a strong interest in something of limited concern to rUK, either. In bargaining situations, iScotland has got to have something convincing to offer to rUK – and other than staying in the UK, or the Clyde nuclear bases, it’s hard to see what that might be.
The second problem is what the Yes side do in response to being denied a currency union – the ‘Plan B’ for iScotland’s currency. There aren’t many currency options; they are using the pound without a currency union (‘dollarisation’, or perhaps ‘sterlingisation’ is the better term), establishing a Scottish currency, or seeking to join the Euro. (The clearest exposition of those is in a video put together by NIESR, available here.) The first and third of those pose major problems – dollarisation/sterlingisation would be unstable and expose iScotland to a range of monetary policy risks over which it had no control, while membership of the Euro normally requires having a national currency first, and then joining the Exchange Rate Mechanism to start the process of tying that currency to the Euro. That implies a lengthy transition, a currency that sunders Scotland from what at the moment is its closest trading partner, and the question of what the constraints of the Eurozone might be in future. From that point of view, an independent currency is the least unattractive option by some way – even if it seems riskiest to referendum voters, and proposing it now would indicate a significant reshaping of plans for independence at a late stage in the referendum campaign.
The third problem is how rejection of a currency union affects other options for Scotland. Talk of repudiating iScotland’s share of UK debt may be attractive (see also Alex Salmond quoted here) to SNP politicians, but is hot-headed nonsense. It would create the very opposite of the ‘velvet divorce’ which underpins the Yes side’s strategy. Indeed, it would amount to a unilateral declaration of independence, as well as creating a major ongoing dispute with rUK. That would affect all plans for independence, not just currency; social union, an open border, co-operation in other matters will all be off the table. It would create significant obstacles to any negotiations over EU membership, and an insuperable barrier to NATO membership, and make it very expensive for iScotland to borrow from international lenders if it could do so at all. Reaching a deal on at least the main issues that underpin statehood with rUK would be vital for Scotland to become independent, and the asymmetry of interest means that rUK holds the whip hand in each strand of those negotiations.
The fourth problem is what this means for ‘independence lite’ as a wider project. The idea that independence would widen the realm of autonomy in some areas (such as fiscal and social policy, and to some degree foreign policy) while retaining existing aspects of the Union such as currency or freedom of movement across the England-Scotland border may be attractive in Scotland. But the reliance on rUK co-operation and goodwill has never made it a robust and achievable plan for independence, and that is what is starting to unravel for the Yes side. Moreover, they are hoist to their own petard in two ways. They have wanted to clarify the basis for independence before September’s poll; while the UK Government has rejected ‘pre-negotiation’ of independence, on currency it is clarifying its position in perhaps the most unhelpful way possible. (The Electoral Commission also said that ‘the UK and Scottish Governments should clarify what process will follow the referendum in sufficient detail to inform people what will happen if most voters vote “Yes” and what will happen if most voters vote “No”‘ in its January 2013 report on the referendum question, so that request of the Electoral Commission has also been addressed.)
The Yes side also has (perhaps reluctantly) embraced the binary Yes/No approach to the referendum (and lost the possible ‘third option’ from the poll). ‘Independence lite’ was a way of softening the impact of the choice of independence for swing voters and reinstating to a degree the middle ground that was otherwise excluded. But the rejection of a currency union deprives the Yes side of that comfort as well. As a result, the choice between independence and remaining part of the UK is becoming increasingly stark.
The challenge that now faces the SNP and the wider Yes campaign is whether to embrace a more radical approach to independence, which may be less attractive to key groups of swing voters (though not other parts of the Yes movement), but produce a more intellectually cogent model of independence, or stick to a middle course predicated on agreements with rUK that look increasingly hard to attain. Nicola Sturgeon’s diary for the next few weeks included a lecture at UCL on Thursday (of which a report will follow) and she will give another in Cardiff on 24 March, so she will have plenty of opportunity to answer such questions.
None of this alters certain key facts, though. The Scottish public still support an expanded form of devolution – not independence, but something that confers signficantly greater autonomy than the status quo. Formulating that option is something that the Unionist parties need to do. It is in their interests to make devolution work better, after all, as well as enable Scots to have the form of government they desire. And putting such an option on the table will help people to regard voting No as a positive choice, not just a reaction to the uncertainties surrounding independence. that also appears to be what voters want, and it is certainly necessary if the referendum is to resolve the wider question of Scotland’s place in the United Kingdom, rather that invite a ’round 2′ of the independence argument at some later date.
This is a slightly revised version of a post that also appears on Alan Trench’s blog Devolution Matters under the title ‘Scottish independence: does taking a sterling currency union off the table change the game?’