Thursday, 29 October 2020

Using sterling would tie the hands of an independent state


Yesterday, Nation.Cymru carried a piece by John Ball on currency and budgets, in which he argued for the continued use of sterling by an independent Wales. I’ve known John for many years, and there are many things on which we agree – but the continued use of sterling after independence isn’t one of them. Much of the detail of the piece is unarguable: using sterling is an entirely practical way forward, it makes the transition easier, and the importance of the psychology of currency continuity is something which should not be underestimated. He rightly dismisses the ludicrous suggestions by unionists that Wales would or could somehow be prevented from using the pound if we chose to do so, although doing so by agreement in some sort of currency union would be preferable. My objection, though, is rather more fundamental that practicality and psychology.

In simple terms, a country with its own currency and whose debt is denominated in its own currency has more freedom over economic policy than a country without a currency of its own and/or whose debt is denominated wholly or largely in someone else’s currency. The former can never go bankrupt for one thing, whilst the latter can – and it can be forced into bankruptcy by others. There is a widespread misunderstanding about the way in which the UK government has funded its response to the pandemic, with the media and many politicians talking about a huge increase in borrowing, likely to reach £300 billion this year alone. Whilst it’s true that the deficit (the gap between income and expenditure) is likely to reach or even exceed £300 billion this year, it is not true to say that that has been funded by borrowing. In fact, as Richard Murphy points out here, whilst the deficit has increased, the debt has gone down. The UK has funded its response to the pandemic entirely by the creation of new money. That is an option which would not be open to an independent Wales using someone else’s money – we would have had no choice but to borrow any necessary funds, probably mostly from lenders outside Wales.

That’s a specific example of the problem, but my objection goes wider, to the whole objective of economic policy. The objective of the Bank of England (as set out in the remit given to it by the government, underlining that BoE ‘independence’ isn’t all it seems) is to maintain inflation at or around 2%, whilst the government has set itself a target of ‘balancing the books’. The first is highly arbitrary and the second is a policy choice, but both are based, ultimately, on protecting the value of private wealth. The ‘cost’ of those policies is seen in an acceptance of a permanent level of unemployment of around 3-5% and the use of austerity measures as and when necessary, including – in the case of the current government – to enable the otherwise unnecessary cancellation of the extra money which they have created. A different government could set an alternative goal of achieving full employment by spending whatever is necessary to achieve that end and using taxation (targeted as appropriate on the basis of the social goals of the government) to rein in any inflation which full employment might cause. In this context, my point is a very simple one – using sterling outsources that decision to the English government in London and effectively mandates the current neo-liberal approach to fiscal discipline, whereas with a new Welsh currency we can take the decision ourselves. And since, for me, setting different priorities – governing in the interests of the many rather than the few, to coin a phrase – is a significant part of the point of independence, the decision is a very straightforward one.

Currency is a very thorny issue for independentistas, that much is clear. The SNP has got itself into a very deep hole on the issue by advocating the use of sterling, although the debate is still raging within the party. There’s a good and lengthy critique of the SNP approach on Open Democracy; everything that applies to Scotland also applies to Wales. I know that, for some independentistas, having an independent Welsh state which broadly follows current economic orthodoxy with a Welsh slant would be enough, even if it looks like just a timid first step to others. For some it’s a political question – tactics, even – about whether the best way to persuade Wales to choose independence is to minimise the impact of that independence so that it looks like a soft and safe option, or to present a vision which emphasises how different things could be. I’ve always been in the latter camp; I’ve never seen independence as a dry constitutional issue but as a means to an end. Merely replicating Westminster in Cardiff just doesn’t do it for me.


Gav said...

It used to be said that the Irish adopted the punt, some years after independence, to rhyme with bank manager.

Spirit of BME said...

Your last sentence ‘does for me’, it should be put up in a big sign outside the engine shed in Collaborator’s Cove.
You are correct on controlling your own currency, rather than allowing outside agencies in a far-off land make these decisions. See southern members of the Euro for classic examples.
As for Little Dickie Murphy and his ‘Murphy`s Law’ on economics and The Money Tree, I shall remain silent.