Monday, 4 June 2012

Why An Independent Scotland Should Have its Own Currency.

When countries become independent from a previous colonial power, as in the case of the European empires, including the British Empire, or are forced to re-establish themselves as "new" nation/states because of the collapse of a dominant neighbour, such as the client states of the Soviet Union; the currency to be used by the new nation/states must be a major priority. Not every new country will choose the same path but ever country must choose some path because no country can operate without some means of conducting trade with other countries or conducting the most basic business of everyday life, within its own borders. It is a long time since primitive society used barter as a means of conducting business, altough in times of war, barter frequently becomes the chosen method because of the scarcity of currency. It will also be used when a currency collapses, as in the case of the Weimar Republic. Some countries have chosen to use the currency of other countries either for the sake of convenience or because they see certain advantages in using the currency of a country such as the USA, rather than establishing their own. The majority however, irrespective of size, establish their own.

If Scotland votes "Yes" in the referendum and re-establishes itself as a nation/state, the currency will be as much of an issue for us, as it has been for every other country in a simialr position. It is not a simple issue and should have been given far more prominence in the debates about independence, than it has been given to date. Since the SNP took the decision to adopt the euro in the 1990s, there has been no debate because it was assumed there would be no problems, therefore the SNP has been able to ignore the inherent contradictions in its European policy. It is only now that the currency has been driven to the verge of collapse, that the true nature of European Monetary Union has been highlighted, with the inherent flaws being recognised. If the euro survives, it will be in a much more tightly controlled version, which then destroys any notion of any members of the "new" euro, being politically independent. At last, the Euro-elite has been forced to admit that for the currency union to work, there must also be a fiscal and political union - in other words, there must be a country called Europe, a federal, United States of Europe. That this has always been the ultimate aim of the European founding fathers, has never been denied in political circles in Europe, only in the UK, particularly in the SNP, has the political spin attempted to claim a different aim.

As the SNP's policy on the euro unravelled - the policy now states it will be in the mid 2020s before an independent Scotland could even consider entry to the euro - the party decided to stick with sterling. Here again, the party's policy has created major problems, out of which it has been unable to talk its way. This is one area where the customary response of the SNP - accusing anyone who criticises the policy of "talking down Scotland" or, in this instance " requires a remarkably diminished view of Scotland and its position not to believe we would be entitled to the same representation as other people" - amounts to no more than hot air. The SNP can whistle in the dark as loudly as it wants to, but it is not going to answer the questions that have been provoked by the party's decision to unilaterally decide to use what will be another country's currency, no matter that that "other country" is one with which Scotland has unfortunately shared a 300 year Union. The problem is self-made because the SNP omitted to explain which kind of arrangement it favoured, in order to retain sterling as Scotland's currency.

Alex Salmond was previously forced to retract an earlier assertion that there are 67 other currency unions in the world, similar to the one the SNP is proposing to have with the rest of the UK. There aren't, there are formal and informal unions, neither of which has been earmarked by the SNP as its preferred option. When Alex Salmond was put under pressure in Holyrood to explain the assertion that the SNP would have a place on the MPC, his spokesman's claim that Scotland "would have the same representation as other people" implies a formal union like the euro. However, the statement from the Treasury denying that an independent Scotland would have a seat on the MPC, said, "Scotland using the pound through a sterlingisation mechanism....would have no say over its own monetary policy." That implies an entirely different relationship and one where Scotland would most certainly have no say on monetary policy.

A currency or monetary union is a much more centralised regime, frequently with political overtones and involves centralised control through a new central bank and a new currency, as in the European Monetary Union. In this kind of formal union, all the countries in principle have a say in forming monetary policy - the famed "seat at the top table". Every member country has an opportunity to state its case, even if it is overruled by Qualified Majority Voting for example. In the case of sterlingisation (the more common term is dollarisation), only the country whose currency is being adopted has any say in determining monetary policy. A country can choose to use another country's currency, for reasons stated above, but the disdvantages are greater than simply having no say in monetary policy. If Scotland were to ask for a formal currency union with the rUK, it would require a formal treaty drawn up and ratified by the parliaments of both the newly independent Scotland and the rUK. Is Westminster likely to agree to re-write the Bank of England Act of 1998 in order to accommodate Scotland? Does anyone really believe that a single Scottish member on the MPC, would have any effect on the voting intentions of the committee, if it was required to support the economic policy of the rUK government? It just isn't going to happen.

SNP supporters have argued that the monetary policy of the Bank of England is unlikely to be any different from that of an independent Scotland, therefore it makes no difference if the Bank of England controls monetary policy. Nicola Sturgeon on "The Big Debate" on BBC, in which she claimed Scotland would have a seat on the MPC, argued that control of monetary policy in the hands of the Bank of England would be a success because "the productivity levels in Scotland and the rUK are very similar".The reason the euro was not a success, or so she claimed, is the great disparity between the productivity levels in Germany and Greece. If that is the case (it isn't) when did the SNP discover it and why were they so much in favour of the euro right up to the beginning of 2012? The other problem with her analysis is that the main reason Alex Salmond and other economic nationalists in the SNP, want independence, is so that Scotland can improve its economic performance and the well being of its people. With independence there is every liklihood that it will, which means the economies of Scotland and the rUK will increasingly diverge, which in turn means control of monetary policy will be vital, otherwise Scotland will be at the same disadvantage it has suffered for generations.

The customary arguments against Scotland having its own currency, is the size of the country and the instability it would suffer in the early stages of independence. The CEO of RBS said recently that if Scotland voted "Yes", RBS would "more than likely move south" as "big organisations tend to be centred in big countries". When asked to explain why it is that Switzerland and Norway are both very successful small countries, with equally successful banking systems, unionists become totally silent. Why does New Zealand, a country with a population of 3.5 million insist on having its own currency, when there are economic arguments for having a monetary union with Australia? Canada, with a population of 33.5 million, exports over 82% of its goods and services to the USA and over 54% of its imports come from the USA, ratios which are far in excess of those that Scotland has with the rUK and the EU, but she guards her independence jealously, including her currency. The population of the USA is almost ten times that of Canada and all the arguments about size and being in bed with an elephant apply just as much as they do for the relationship between Scotland and the rUK.

Unionists will argue that all of those examples are of countries which have been independent for generations and Scotland would be different, particularly in the current economic situation in which we find ourselves. They will exaggerate the problems associated with rating agencies and the currency markets. Will a Scots currency maintain its value against other major currencies, will it become a petro-currency and make our exports too expensive, causing us to lose markets, will we lose our triple A status? While all of those are valid questions no one can give guarantees, least of all the Unionists, who excel at asking for guarantees in the event of independence while refusing to give the same guarantees on behalf of the Union and more importantly, have a history of broken promises made by serial liars for generations.

There are currently 25 countries in Europe which do not use the euro, having currencies of their own, all of which are in a healthier state than the euro. There are 221 currencies in the world, some of which are in informal currency unions but in August 2011 only 13 countries had AAA status, after the USA lost its top rating. Those countries included, Austria, Australia, Canada, Denmark, Finland, France, Germany, Netherlands, Norway, Singapore, Sweden, Switzerland and the UK. How many major economies and large countries are included in that list? Since then France has lost its AAA status and the UK has been placed on "negative watch" by Moody, and nine European countries were downgraded in January 2012. Should we really be getting ourselves bent out of shape over a collections of agencies, all of which gave Lehman Brothers AAA status the week before it went into liquidation?

When the Soviet Union broke up, those countries which had been behind the Iron Curtain with their economies controlled by the Soviet Union, suddenly found themselves as new nation states again. Without exception, they all established their own currencies. Within five years between 1990 and 1995, Poland completely turned its economy around from a command economy to a market economy, achieving its pre-1989 level of GDP in that period. The Balkan Republics of Latvia, Estonia and Lithuania have made remarkable progress, as has the Czech Republ;ic since its Velvet Revolution of 1993. None of them had the economic structure that Scotland has, the natural resources, the banking structure and the financial experience needed to make sure our own currency could work. All of those countries had to start from a base much lower than the base from which we will start - but they did it.

Obviously setting up an independent country and our own currency will require commitment and at the moment, that is the only thing that we lack, to make it work. Of course we will have to make preparations for the new curency to come into circulation. We already print our own bank notes, which are already familiar in the financial world. We have a reputaion for financial expertise and more importantly, financial probity, therefore we have a head start which none of the countries mentioned above had. We are not going to get a seat on the MPC and why would we want one? We are not going to control monetary policy if we keep sterling and it is vital that we do. "All we have to fear is fear itself" may now be a cliche, but it is more apt when applied to Scotland than it ever was when applied to depression-era USA.

1 comment:

  1. I agree. The British Government is likely to make things very difficult for a nationalist Scottish break-away state using Sterling. As far as the Euro goes- I don't think it will exist in five years from now. If it does- it will be so tightly controlled, that "independence" will be a farce. Democracy favours Scotland's own currency. This should be publicly owned- NOT privately owned like the U.S. Dollar. For the first five years at least, the Scottish currency should be pegged to a basket of "Big Five" currencies, namely Sterling, the U.S. Dollar, Swiss Franc, Canadian Dollar, and Japanese Yen. This pegging would protect Scotland from unscrupilous currency traders. Once stablility, and economic strenghth is achieved, then Scotland could consider un-pegging it's currency and allowing it to float freely. North Sea Oil will definitely play a role- either positively or negatively. Time will tell- and the oil price.