What currency an independent Scotland might adopt used to be like the number of angels who can dance on the head of a pin – an absorbing problem for fanatics and geeks to argue over, but nothing to trouble the rest of us who have to live in the real world.
Has Brexit, belatedly, changed that?
Before the 2016 referendum First Minister Nicola Sturgeon asserted that Scotland being dragged out of the EU against its will would constitute a ‘material change’ which would justify a second independence vote. The electorate, however, did not agree.
Despite Scotland voting overwhelmingly to Remain, support for independence stayed roughly where it was in 2014 when it was decisively rejected. Opinion polls up until the end of last year suggested that the Scottish electorate did not think that leaving Europe made leaving the UK any more desirable.
But the hideous mess Theresa May’s Government has made of the Brexit negotiations and the inability of the Westminster Parliament to agree any alternative may have tipped the balance.
On the eve of the SNP conference came an opinion poll which showed a narrow lead for ‘Yes’ should a second independence referendum be held now. As Professor John Curtice has pointed out, it is only one poll and we should not read too much into it. But it possibly means that we real world dwellers may have to take more notice of esoteric nationalist debates, such as the one they had on the currency at the SNP conference.
The pound Scots?
In the 2014 referendum campaign Alec Salmond, then First Minister and SNP leader, promised that an independent Scotland would continue to use the pound sterling in a formal currency union with the rest of the UK, which would include a Scottish representative on the monetary policy committee of the Bank of England. It was Scotland’s pound as much as anyone else’s, he said.
It was a claim which showed his ignorance of Scottish history. Before 1707 Scotland had its own currency, the pound Scots, which traded at a 12 to one discount to sterling. The right to use the English pound only came with the Act of Union, which Salmond wanted to repeal.
But it was also politically naïve. Salmond made his confident assertion that Scotland would be able to continue in a currency union without bothering to ask the rest of the UK and was caught off-guard when the then Chancellor, George Osborne ruled it out. The Westminster Government was part of the ‘No’ campaign in 2014. Why would it offer a major concession to the ‘Yes’ side?
A currency union was also economically undesirable for both countries. For the rest of the UK it would have meant an increased risk of instability, since it would have no control over the fiscal policies of an independent Scotland. A profligate Scottish Government issuing debt in sterling could affect the value of the pound.
On the other side, could Scotland really call itself independent when it had no control over monetary policy and very little influence on the value of its currency?
A sterling fudge
To avoid a rerun of the argument, Nicola Sturgeon set up the Sustainable Growth Commission with a brief to come up with a more robust answer to the currency question and a more plausible forecast of the economic future for an independent Scottish nation. It was always a difficult assignment, which would have to rely as much on the public relations skills of its chairman, Andrew Wilson, as it would on the economic expertise of Professor Andrew Hughes Hallett.
The Commission suggested that an independent Scotland would continue to use sterling informally (an arrangement sometimes described as ‘sterlingisation,’) until such time as Scotland was ready to adopt its own currency. No time limit was given, but it might be ‘for an extended transitional period.’
It was a fudge, of course, designed to defer the currency argument until after a second independence referendum campaign, but its deliberately vague language did not please the SNP conference, which hardened up a motion from the leadership, calling for a Scottish currency to be introduced ‘as soon as practicable.’
It did not convince the unionists either. These Islands, a group campaigning against independence, issued a forensic demolition of the Commission’s arguments.
But it probably acknowledged a reality. A Scottish currency would be hard to establish.
Higher prices will hit poor hardest
The rest of the UK is Scotland’s largest trading partner by a considerable margin and would be likely to remain so for decades after independence. Major Scottish export companies could choose to continue to use sterling, just as some Scots merchants did before the Act of Union. Those quoted on the London Stock Exchange may even follow the lead of the Company of Scotland in 1695, which issued accounts and conducted all its business in sterling rather than in Scots pounds.
Only those businesses whose sales and costs were wholly within Scotland would be insulated from the extra costs of currency exchange and the risk of a fall in the value of the new currency against sterling.
I don’t discount the argument that an independent Scotland could find a new dynamism which would improve its economic performance. But it will not happen overnight and given Scotland’s weak economic and fiscal position relative to the UK averages, a new currency would be almost certain to start at a discount to sterling. That might mean a boost for Scottish exports, but it also means higher import prices.
The better-off and older new Scots would suffer least. Banks would continue to offer sterling accounts alongside those in the new Scottish currency. Anyone with a private pension scheme, or savings in an ISA, probably has their assets in a London registered sterling nominee account already.
As we are discovering with Brexit, constitutional upheaval causes economic pain and those who will suffer most are the poor and disadvantaged. They would bear the brunt of higher prices and lower public spending.
CORRECTION: I have deleted a sentence stating that UK government would continue to pay pensions in sterling. Thanks to a constructive discussion on Twitter.
Image: James V1 noble coin, 1577 CC BY-SA 3.0
Ray Perman’s new book, The Rise and Fall of the City of Money, will be published in the autumn.
Further reading/viewing: Tim Rideout, supporting successful amendment at #SNP19, via The National