the Bank of Scotland, Edinburgh - wikimedia
George Osborne entered the debate over Scottish currency with reports he is going to rule out Scotland using the pound. Of course, that's not likely to be quite what he says. The pound is a free floating currency. If any government wishes to declare that it will only collect its taxes in it, it could do so. What he's really ruling out is currency union: giving Scotland a say in the running of the pound.
Given that our currency is already managed by the independent Bank of England Monetary Policy Committee and that it is very clearly run in the interests of the City of London rather than the rest of the country, this is hardly a threat. Essentially, he is wading in to say “we will continue to not listen to you”.
When Mark Carney entered this debate recently, what he said was that it would be possible for Scotland to keep the pound, but that this would work better if it involved sharing some powers with the rest of the UK: things like banking controls and some elements of fiscal (tax and spend) policy. So in effect, what Osborne (and, apparently, Ed Balls and Danny Alexander) is doing is declaring that he won't be willing to enter any negotiations about such an agreement with an independent Scotland. In doing so, he's showing a surprisingly hostile attitude to the Scots, in contrast with his boss' rose tinted speech last week, though Osborne being the bully boy is nothing new.
The Scottish government's reaction is that, if Scotland can't be in a currency union, it will walk away from its share of the UK's debts. But what it isn't saying is perhaps a more important point. The pound is a terrible currency for Scotland. There are at least three reasons to believe that replacing it with an independent currency would be a very good idea indeed.
The first is that it would allow for a more significant departure from Westminster policies. If you're a sort of soft social democrat like Salmond, then the need to have a vague fiscal alignment with Whitehall is not a huge issue. The sorts of changes the First Minister wants to make to Scotland's tax and spend policies are, in general, moves in the right direction, but nothing particularly radical. Yes, he wants to make Scotland fairer, but he wants to do it within the spectrum of conventional policy. Westminster is unlikely to have much issue sharing a currency with a country with those sorts of plans. If you want to see a more significant change in the way the country is run (as we do), changes that the Treasury would loathe, then any link with Westminster is more of an issue.
The second reason to ditch the pound was summed up by the FT last week: it would “mean Scotland could use monetary policy and the exchange rate to soften the impact of any future crisis”. In other words, having control of a Scottish currency would be good all of the time, but even more important in a crisis (as an aside, the FT piece this comes from seems to imply they think that it's more likely than not that an independent Scotland would move towards its own currency. Given the scorn poured by Better Together types about this proposal only months ago, that's quite a turn around in public debate).
The final reason we should ditch the pound is that it's helped destroy Scottish exports and, particularly, our manufacturing. The main argument you hear in favour of a currency union is that the majority of the stuff that Scotland exports is to the rest of the UK. But really, that should be the main reason to be against a currency union. The pound is a hugely expensive currency. That means it's expensive for people in other countries to buy the stuff we sell. No wonder 70% of Scottish exports go to the rest of the UK. No one else can afford to buy what we make.
This is a huge problem for the Scottish economy. In fact, it's a big problem for most of the British economy outside the City of London as John Mills has long argued. And why is the pound so Expensive? Well, two reasons, neither of which apply to Scotland.
The first is the City of London. If you want to trade there, then you need to buy pounds. Because lots of people want to trade there, the pounds become expensive. Because the pounds are dear, it becomes costly for people to buy our other things too – and that clobbers our manufacturing sector.
In a sense, we suffer from a version of what economists call Dutch disease. In the 1960s, the Netherlands went through an economic crisis right after they discovered oil. The conventional explanation for this is that the oil made their currency more expensive, which made it more expensive for people in other countries to buy their products, and so their other industries were priced out of the global market.
In part, this is what has happened to the British economy over the last couple of decades or so. As the City has been deregulated and has taken off, it has been rather like when the Netherlands struck oil.
The second cause of an over-expensive pound is policy choice. As Mills points out, in the 5 years between 1977 and 1982, the pound went up in value by 64 per cent against all other currencies. After panics about inflation had defined the 1970s, the government was keen to get it under control. That policy has remained. There are lots of ways the government could make the pound and so British exports more affordable, but that would be bad for the city. So it chooses not to.
If you're a trusting sort you might think this is because the government genuinely believes that keeping low inflation is vital for driving investment. If you're a cynic, you might think it's because a high value currency is good for the banks, and they have more political sway over government policy, partly because of how much they contribute in party funds.
Some respond with the fear that a Scottish currency would also be very expensive, which is an understandable worry. An independent Scotland would no longer be propping up the English economy with a massive oil subsidy. As a result, it would likely be significantly richer than it is today. Throw in Scotland's own significant financial services industry and the coming boom in renewable energy and there's a risk that other industries get squeezed out as the world scrambles for Scottish Marks as the currency of one of the energy capitals of the planet. Now, having an expensive currency because you are rich is a lot better than having an expensive currency because someone else is rich. So from a national perspective, this wouldn't be a disaster. But it wouldn't deliver the boon to Scottish manufacturing that a cheaper currency could.
However, there is a way around the oil problem. It's what Norway does and it is already SNP policy. The Norwegians syphon the cash from their oil into a sovereign wealth fund. In part, this is about saving money for future generations. But it has another effect too. The fund is banned from investing in the Norwegian economy (and owns 1% of all the shares in the world). This may seem counter-intuitive, but the impact is to suppress demand for Norwegian Krona, and so bring down the price of their currency, allowing them to export other products too.
The situations aren't entirely comparable. But assuming we ignore the crushing imperative to leave the filthy stuff in the ground, there's no good reason to believe that we wouldn't, as is the policy of the current Scottish government, set up a similar oil fund for future generations.
Which leads us neatly onto the second reason the pound is so strong. Public policy. As we've seen, where governments aim to have a sensibly valued currency, they have policy levers to help them deliver this. In fact, the Norwegian oil fund solution is just one of these – they could buy up foreign exchange reserves, increase the money supply, and so on. The problem at the UK level is politics: it is the political rather than the economic power of the city of London which makes the biggest difference.
At Westminster, every Chancellor for a generation has wooed the City. In Scotland, by contrast, there is a long standing political desire to bring back manufacturing. With the right policies, we could ensure that we bring down the value of a Scottish currency to below that of the British pound.
If we did manage to keep the price of a Scottish currency down, it would be cheaper for people in the rest of the UK as well as the rest of the world to buy our stuff. So they'd buy more of it, which would more than compensate for any hassle in changing notes. In other words, if we had our own currency, we could increase demand for our goods both from the rest of the UK, and from the rest of the world. It would also, incidentally, make it comparatively cheaper for Scots to buy stuff made in Scotland, what economists call import substitution. This would mean not just a further boost to the Scottish economy, but also that the net impact would likely be a balancing of trade, leading to a reduction in the carbon emissions associated with shipping so much stuff to us.
So, to summarise, if Scotland wishes to change its policies radically from where they are now, or have more room to manoeuvre in a crisis than we do now, then we should set up our own currency. If we want to develop any export markets outside the rest of the UK, we should should run our new currency in such a way as to make it less expensive than the pound is now. And this should be possible, despite the fact that Scotland is richer than the rest of the UK, because the UK suffers not just from Dutch disease, but also from a hegemonic neoliberalism which binds the hands of the state to the needs of the City of London.
What does this mean for the vote in September? Even if we think Osborne isn't bluffing (and he is – he wants an expensive pound, so he wants Scotland's oil traded in it), if Scotland really wants to keep the pound, we could. Just as El Salvador uses the dollar and, in fact, as the Adam Smith Institute and City AM's Pete Spence are calling for. And given we currently have essentially no say over monetary policy, this wouldn't change much for the worse.
But a yes vote would give us chance, whether after a week or ten years, to set up our own currency. And that would be a very good thing.
Iceland, with around the same population as Aberdeen, has its own currency. So does Cape Verde, with a population around that of Edinburgh. So do Norway, Denmark, Sweden, Switzerland, and most of the countries and self governing territories of the world, most of which, as it happens, have fewer people than Scotland. Sharing the pound with England wouldn't make anything worse than it is now, but having our own currency would give us another tool in making them much better.
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