“Whilst the purpose of this report is to specifically critique the report produced by the Growth Commission it is done so in the spirit of the principle laid out by the First Minister on the latter’s publication. If the Growth Commission report was produced to be discussed, then this report seeks to add to that discussion”
Those proposals were for an independent Scotland to unofficially keep using the pound sterling – outside of currency union like the one proposed in 2014 – for a period of time until Scotland’s economy is deemed ready for the launch of its own independent currency by the means of meeting “six tests” covering areas such as deficit, foreign reserves and economic need. Our report suggests that the plan proposed, especially alongside the “six tests” will make it difficult, if not impossible, to launch an independent currency and that the proposals risk locking Scotland into a future of permanent Austerity not dissimilar to that experienced by some areas of the Eurozone.
The report can be read here or by clicking the image below.
My object isn’t Sterlingisation per se – it can work given certain circumstances – but those circumstances look unlikely to be met in the Scotland that the Growth Commission has proposed to create.
The “six tests” in particular seem to try to pull Scotland away from creating its own currency and could well leave Scotland in the grip of London financiers whose sole motivation would be to extract as much wealth from Scotland as possible.
Briefly (and I encourage folk to read the full paper for more detail), the six tests and why I believe that they are a barrier to a Scottish currency are:
- Fiscal Sustainability – The Growth Commission would limit Scotland to a 3% of GDP deficit and 50% of GDP debt ceiling. This would prevent Scotland from spending during a financial down-turn (precisely when government spending should increase) and would increase your personal debt if Scotland’s overall trade balance isn’t at least a 3% of GDP surplus. This particular target also seems to be at odds with the claim in the report that it would not lead to Austerity because the Scottish Government would increase public spending in real terms (i.e. after accounting for inflation). But the Fiscal Sustainability rule states that public would also be limited to 1% below GDP growth. This means that if GDP Growth is less than inflation (current GDP Growth is about 1% per year whilst inflation is about 3%) then public spending would shrink in real terms. This is Austerity.There’s another problem with linking public spending to GDP growth this way. If the economy experiences “wageless growth” (perhaps by a foreign company re-domiciling itself in Scotland) then GDP would grow but tax revenues might not. Without additional tax revenue, public spending couldn’t increase no matter how high that growth is. On the other side of the the problem, perhaps the Scottish Government closed some tax avoidance loophole and brings in additional tax revenue without growing GDP. This additional revenue couldn’t be spent to increase public spending either because of the link of spending to GDP. Either way, spending could end up severely and unnecessarily constrained due to an arbitrary deficit rule.There’s also the question of whom Scotland would borrow money from to fund any deficit at all (which would be the case as a Sterlingised Scotland would be unable to create money or employ Quantitative Easing). The London money markets who would no doubt dominate such funding would serve to maintain a link to the UK economy and may well demand conditions on loans such as demand to cut public spending or sell public assets (i.e. Austerity). Even if this doesn’t happen, an economic crash in London as happened in 2008 could lead to those financial institutions being unable to loan money to Scotland at all – an economic crash in rUK could lead to a liquidity crisis in Scotland.
- Central Bank credibility – Despite the branding exercise in the Growth Commission report, the institution set up to manage money in a Sterlingised Scotland would not be a Central Bank. It would lack many of the key functions of such a bank and would instead act like a monetary institute. One of the consequences of this may be to make it much harder for an independent Scotland to rejoin the EU as it may be difficult for it to meet membership requirements such as Chapter 17 of the Aquis Communinitaire. The politics of Brexit may prove critical as the EU’s relationship with Scotland would likely be flavoured by the EU’s relationship with the rUK and the indirect links between all three.
- Financial Requirements – The fear that an independent Scottish currency may result in people who have mortgages and similar liabilities being paid in a different currency from their debts – exposing them to transaction charges and possibility foreign exchange fluctuations – is a real one. However, laws like the Mortgage Credit Directive (an EU law written into UK law in 2015 thus not affected by Brexit) mandates that companies should provide measures to mitigate such risks up to an including offering the redenomination of such liabilities into the currency of the customer’s residence or income.The more serious risk to such liabilities comes from Sterlingisation which would tie Scotland to the interest rates of the Bank of England. Should the UK’s property market overheat again and should the Bank of England raise interest rates to suppress it, it would affect the Scottish housing market whether or not it was similarly overheating. Should the Scottish market be on a downturn at this point, an interest rate rise could well trigger a market crash.
- Sufficiency of Foreign Reserves – The tools available to create foreign reserves in a Sterlingised country are very different from those available to a country with an independent currency. With an independent currency on day one, Scotland could request a share of reserves from the UK as part of debt and asset negotiations (it couldn’t do this ten years after independence if it wanted a currency later) and could use tools like currency swaps with other Central Banks who wanted £Scots so that their home businesses could trade with Scotland (a Sterlingised Scotland would have no currency to swap). Further, the level of reserves deemed “adequate” for a Sterlingised country may be different from those of an independent currency. This mismatch may make it difficult to transition to an independent currency later.
- Fitness to Trade – Brexit is identified in the GRowth Commission report as a “clear and present danger”. The UK has already experienced a substantial loss of value in the Sterling and the prospect of a chaotic and unplanned Brexit may cause another. Sterlingisation exposes Scotland to the economic decisions of a UK utterly beholden to London financial markets (another danger identified in the report) which substantially reduces Sterlingisation’s fitness to trade with respect to the Scottish economy – especially if the intention of independence is to diverge Scotland away from the UK’s low wage, low security, low quality of life, consumer debt economy.
- Correlation to Business Cycles – The report states that Scotland should only get an independent currency if and when Scotland’s “economic cycle” delinks from the UK’s (i.e. booms and busts happen at the same time north and south of the border). Sterlingisation will act to synchronise those cycles (and prevent efforts to build an economy not based on booms and busts!). As stated above, if rUK’s economy overheats and the Bank of England raises interest rates to cool it down, it’ll freeze Scotland’s economy regardless of what is happening up here. The reverse scenario is also true where a lowered interest rate would overheat Scotland’s economy.
Sterlingisation could work for Scotland given favourable circumstances but the Sterlingisation plan in the Growth Commission report is a recipe for permanent Austerity in Scotland – regardless of any desire within the report to the contrary – and links the Scottish economy to the UK’s to an unacceptable degree (in some respects, even more tightly and more constrained at present). The plan here certainly does not lay out a timeline towards an independent currency and in many ways acts against the creation of one.
Common Weal’s plan for currency takes a very different path with a defined timeline of creating one during that transition period between a referendum and formal independence such that the currency would be fully functional and ready on day one of independence.
I understand the Growth Commission’s desire for an option focused on continuity and familiarity but I believe that that option can be much better met through our own currency initially pegged to Sterling rather than informal Sterlingisation (we’re already used to using multiple versions of banknotes – something nearly unique in the world). This would grant a security of pricing, especially during the transition period, but also gives Scotland the option to change or move the peg should the economy require it. This can be done very quickly, as evidenced by Switzerland in 2015, but should a Sterlingised Scotland somehow meet the “six tests” and decide it needs a new currency, it would then have to approve and move through the three year process of launching that new currency. Almost an entire Parliament would be dominated by that decision and events may well unfold during it which complicate the process. It’s a much less flexible, secure and sustainable position.
Ultimately, the Growth Commission’s report is a discussion document. It lays out one possible scenario. Common Weal has laid out another. Other groups may well present their own options as well (and this should include pro-Union groups and their responsibility to show how their vision of Scotland in the Union will be better than the one we’ve got today).
The National Assemblies planned by the SNP as well as party branch meetings and other public events have the chance now to discuss the plans that have been produced and to pick the one they prefer. Certainly, my experience so far is that almost all activists want an independent currency for an independent Scotland and I’m sure that most of them want it as soon as possible.
I want to hear your thoughts though. Let’s get that discussion going.
Common Weal’s research is entirely funded by donors such as yourself. We don’t take government money, corporate sponsorships and don’t even have adverts on our website (though WordPress occasionally puts them on this blog because I don’t have a paid subscription to them – I don’t get a penny from them).
If you’ve read through our policy library, like what you see and wish to donate, you can do so here.
We also have our shop where you can buy merchandise and our new book How to Start a New Country.