Last updated: August 19, 2014 7:35 pm

Scotland’s Nationalists address currency conundrum

With less than a month to go before the independence referendum, Scottish nationalists are battling to shore up what many see as the weakest pillar of their campaign – the question of what currency to use if Scotland votes to leave the UK.

Pro-union supporters have been piling pressure on Alex Salmond, first minister and Scottish National party leader, to come up with a Plan B to his preferred independence option of continuing to share the UK pound in a formal currency union – a proposal all main Westminster parties have vociferously rejected.

On Tuesday, Mr Salmond sought inspiration in the fight for currency credibility from Crawford Beveridge, former chief executive of Scottish Enterprise and chair of the Fiscal Commission, a group of advisers to the Scottish government that has argued that currency union would be in the interests of Scotland and the UK.

Ahead of a lecture on Tuesday night in Glasgow from Mr Beveridge, Mr Salmond had been trying to refine his message to stress that, while he is sure Westminster would quickly agree to a currency union in the event of a Yes vote, an independent Scotland would have other viable options. Mr Salmond refuses to name his Plan B, but topping his list of alternatives – at least as a stopgap – seems to be the continued use of sterling without a currency union.

In his lecture, Mr Beveridge said the Fiscal Commission felt critics of formal currency union had overstated its risks and understated its benefits.

“We remain firmly of the view that a well-designed monetary union is the best option for both Scotland and the UK post-independence,” he said.

Mr Beveridge said sterlingisation – use of sterling without a currency union – would be one of the other viable options but the advisers did not see it as a long-term choice: Scotland would have no say on monetary policy and no central bank to act as lender of last resort. “It is primarily [an option] in terms of a manageable transition and as a mechanism that opens up other options over the long term,” he said.

Yes camp strategists say that, by highlighting that Scotland would have other options, they hope to reassure voters that the country would not go empty-handed into post-referendum negotiations with the rest of the UK.

If [the plan] is just to use the pound anyway without a currency union, as they hint at, there would be serious consequences for Scotland’s public services

- Jack Perry, former chief executive of Scottish Enterprise

But it is unlikely to be enough to shift attention away from an issue that pro-union campaigners see as a potentially fatal weakness in the nationalist case.

Alistair Darling, former UK chancellor and leader of the cross-party Better Together campaign, made no apology for focusing almost exclusively on the issue in recent days.

“Currency is central to everything that a country does,” Mr Darling told the Good Morning Scotland radio programme. “It is critical. It is so central to this campaign.”

Better Together has also found supportive experts and business leaders to contest the Scottish government plans.

Yesterday, Jack Perry – like Mr Beveridge a former chief executive of Scottish Enterprise – said a formal currency union would not survive the likely economic divergence between an independent Scotland and the rest of the UK, but that sterlingisation would be an unsatisfactory Plan B.

“If [the plan] is just to use the pound anyway without a currency union, as they hint at, there would be serious consequences for Scotland’s public services,” Mr Perry said.

“Scotland would have to run a fiscal surplus – cutting spending and increasing taxes – to have the cash to make that plan work.”

Doubts about Mr Salmond’s currency proposals have been fuelled by differences of view within the pro-independence movement. David Simpson, an economist and supporter of independence, says formal currency union would be preferable from the point of view of the UK as a whole, but that Scotland’s interests would be better served by sterlingisation.

For him, the attraction of informal use of the pound is that taxpayers would not have the means to underwrite banks and it would impose fiscal discipline – not an argument that has wide appeal within the left-leaning SNP.

A more widespread view among pro-independence campaigners is Scotland would be best to adopt a new currency. This would give it maximum control over economic policy but expose its businesses to greater exchange rate risk.

Mr Salmond is likely to remain on the currency defensive, but he can take comfort from the fact that none of the political punches landed by pro-union campaigners appears to be a knockout blow.

Despite weeks of discussion of currency plans, recent opinion polls suggest that the No camp’s lead is narrowing.

Mr Beveridge said on Tuesday that while Scotland’s currency plans were important, they should not crowd out other issues in the referendum debate.

“I’m not that worried about the currency, because every country has one and we are going to have one too,” he said.

. . .

SCOTLAND’S CURRENCY CHOICES

If the UK refuses a formal currency union with an independent Scotland, what choices would the country have, asks Kiran Stacey?

(1) Use the pound anyway

Even if the Westminster government does not agree to share the pound, Scotland could use it anyway, without a say in monetary policy. Ecuador and Panama, for example, have adopted the US dollar. But it would be unusual for a country with an economy the size and complexity of Scotland’s to follow such a course.

(2) Join the euro

For many years, the Scottish National party’s stated policy was to join the euro after independence. This would tie the country more closely to the bloc and give it the stability of a large monetary union. Since the eurozone crisis, this has become much less popular in Scotland but it might be forced to follow this path if it wants to continue as an EU member state. Even so, it would not be an immediate option.

(3) Launch a Scottish currency

Many nationalists have pushed for the Scottish government to back this option, because it would give the most independence. But establishing a new currency is risky. Without its own borrowing history, an independent Scotland might find the currency quickly loses value when traded and markets could demand a higher interest rate on its debt. It is also likely to be more volatile than an established currency. There are two quite different approaches to an independent currency: to peg it to the pound or to let it float.

-------------------------------------------

Letter in response to this article:

Scots could turn to Hong Kong / From Dr J M Wober

Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

NEWS BY EMAIL

Sign up for email briefings to stay up to date on topics you are interested in

SHARE THIS QUOTE