Wednesday, 26 October 2011

Saving the £?

Tom Bodden’s report on the SNP’s drive for independence refers to one aspect of the SNP’s proposals which I hadn’t previously realised.  An independent Scotland, he says, “would retain the pound as its currency and any decision to join the Euro would be taken in a referendum”.  That surprises me somewhat.
I can understand the political imperative behind it.  It makes the independence option look a little ‘safer’.  And I’ve heard many nationalists in Wales arguing that an independent Wales should retain the pound as well.  But it’s the economic rationale that I don’t understand.
As a part of a unitary state called the UK, with its own currency called the pound, Wales and Scotland send MPs to the Parliament in London, where they have as much (or as little) influence over monetary policy as any other MPs.  As direct members of the European Union and part of the Eurozone, Wales and Scotland would have as much (or, again, as little) influence on monetary policy for that zone as any other states of comparable size.
But to be part of a currency union with another country whilst having completely separate governing arrangements would mean having no influence whatsoever over monetary policy, and being completely at the mercy of decisions taken elsewhere.  I don’t understand why anyone would want to go from ‘not having very much influence’ to ‘having no influence at all’ over one of the main levers of policy affecting their economy.
I sympathise with the desire by some to see an independent Wales (or Scotland) adopting a currency of its own.  It makes a certain sense from a nationalist perspective, and puts the maximum level of power over monetary policy into the hands of the Welsh Government.  But it also seems to me to be attempting to swim against the tide of history.  For all its troubles, I’m still convinced that european currency union is here to stay, and that membership of that union is the least worst option for a newly independent state.
I’d rank an independent currency as the second option though.  But being an independent country and sticking with the pound looks to me like the worst of all worlds option.


Anonymous said...

"But being an independent country and sticking with the pound looks to me like the worst of all worlds option."

... but best of this world, today and in deflecting an issue which gets very complicated. Scotland or Wales would stick with sterling for the first years of independence for expediency sake if nothing else. So, Salmond it playing safe but also being truthful. Scotland would not adopt its own currency on day one of independence - no state ever does.

Glyndo said...

Off topic

Buckingham donated £5,000 via Crouch to a successful candidate in a marginal seat, Carmarthen West.

John Dixon said...


It's not so much off-topic as on the wrong post! See this one. Good to see the Guardian catching up.

MH said...

As I read the situation, the SNP would probably agree that join the Euro is the best option; but given the current crisis they realize that it would not be popular and would tend to reduce the Yes vote in the independence referendum. In a way it's not so different from the position with regard to the monarchy ... why complicate one issue by adding another?

Like you, I believe that the Euro will survive. The current crisis is primarily to do with the banks and whether they can remain afloat after taking a loss on their Greek bonds. The currency itself is a secondary matter, for the Greek sovereign debt would be just as real no matter what currency it was in, and the losses to the foreign banks that had bought their bonds would be as great whether the Greeks go into structured default or had the option of devaluing.

But you can't swim against the tide of popular reporting. It suits the agenda of the media here to portray this as a Euro crisis rather than a debt crisis, because it then becomes someone else's problem: something that the UK has been reluctantly dragged into, but something that would have been far worse for the UK if we had ever been silly enough (in their terms) to join the Euro. Yet when seen as a debt crisis, the UK is on very much more shaky ground than the countries we like to think are in crisis, as this graphic from Bloomberg illustrates.

Turning to Scotland's options: if they thought that the Euro was out of the question in the long term, the best option would probably be to issue their own currency, but pegged to the value of sterling. That provides short term familiarity and makes it easier to vote for independence and then adjust to it; but still leaves the long term option of going your own way if there is a real crisis. Ireland's currency was pegged to the UK's for half a century before they decided it was better to float free. So deciding to retain sterling is probably an indication that the SNP don't see remaining outside the Euro as lasting too long. And keeping sterling (although it reduces Scotland's monetary policy options) is by no means incompatible with independence. A good few independent countries use the US Dollar as their currency, and some independent countries use the Euro even though they are not in the Eurozone.

Boncath said...

Excellent input from M H

Correct me if I am wrong but hasnt Scotland got its own paper notes --
they may not be too happy with the £1 coin as it is extensively counterfeited You can have as many as you like in plastic wrap you just have to visit the Pyramids

You may also remember that part of the case against an overnight switch to the EURO was the cost of new coin operated machines

John Dixon said...


I'm sure that you're right about the political imperative of not confusing the vote by introducing other elements. I'd be a bit worried, however, about the charge of using a misleading prospectus.

Thinking back to our own referendum in March, I thought that those like Carwyn Jones who repeatedly said that a 'yes' vote would not lead to taxation powers were misleading people. Technically, they were right - taxation powers were not on the agenda; but it was obvious to many of us that the issue of taxation powers wasn't going to go away, and would move up the agenda in the event of a yes vote.

If, as you say - and I'd tend to agree - "the SNP don't see remaining outside the Euro as lasting too long", then there is a need for caution in talking about retaining the pound.

I know from my own experience that a simple message is easier to convey that a complex one - just as long as over-simplification isn't in danger of misleading.

Anonymous said...

You seem to be under the illusion that the British government somehow pulls leavers of control over the value of the pound. It doesn't. When sterling crashed out of the ERM is a classic example. The government tried to exert influence but the markets had other ideas. The current Euro crisis has not exposed Greek government to any lesser control over it's economy, rather the Euro has exposed Greece to having falsified it's entry qualification to the Euro in the first place. It is for this reason the proposed referendum in Greece will not be about accepting an austerity package but whether Greece will remain in the EuroZone. An independent Wales or Scotland will not be advantaged or disadvantaged by being in either currency in terms of governmental influence, it will be exposed to the rigours of the markets, regardless.

John Dixon said...


"You seem to be under the illusion that the British government somehow pulls leavers of control over the value of the pound."

No, I think you misinterpret me. I wouldn't want to disregard the value of the currency entirely, but the issue for me is the question of monetary policy (primarily the level of interest rates) and its effect on the 'real' economy, rather then the exchange value of the currency itself (although there is, obviously, a relationship between them).

One of the problems which Wales has long faced is that monetary policy set in London on the basis of the perceived needs of the UK as a whole often does not meet the needs of Wales. The main argument that I've heard for a Welsh currency would be the ability to set interest rates to suit our needs, rather than being tied to sterling rates.

I entirely accept that the extent to which monetary policy is determined by governments rather than responding to internationcal capital markets has been limited by globalisation, but there are still differences between interest rate regimes in say the US, the UK, and the Eurozone. And those differences reflect differences in the economies and the point in the cycle.

There isn't a perfect answer for Wales - because of the limitations on freedom of action - but over the long term, I believe that it's clear that the 'European' regime would have served Wales better than the UK regime.

But whichever regime we're part of, having some influence over policy is better than having none.