The highly respected and certainly not right wing, Financial Times columnist Martin Wolf presents a pretty devastating analysis of the Scottish Government’s planned currency union. He argues that it would be folly for the rest of the UK to enter into such an arrangement voluntarily and advises Scots against it as well.
Mark Carney, governor of the Bank of England, diplomatically stated last week that currency arrangements post independence “would be a matter for the Scottish and UK parliaments”. However, Wolf argues that as the person responsible for monetary stability, he has a duty to advise on the implications because the BoE would have to operate the union. Learning from “optimal currency area” theory and the recent painful experience of the eurozone, he argues there are two conditions for success.
1. A banking union with common supervisory standards; access to central bank liquidity and lender-of-last-resort facilities; common mechanisms for “resolving” banks in difficulty; and a credible deposit guarantee scheme. This would probably be accepted by the Scottish Government, or at least by John Swinney who has said as much in interviews.
2. Shared fiscal resources and arrangements. This is the big stumbling block, as it undermines the case for independence. If you can’t set your own taxes, what’s the point?
Of course Wolf is not the only person to point this out. I would modestly point to my own chapter in the ‘Red Paper on Scotland 2014’ and an earlier article in Scottish Left Review and a Red Paper pamphlet. In today’s Scotsman, Brian Wilson makes a typically robust swipe at the concept, highlighting unusual common ground with Jim Sillars, who is equally robust in his new book. The pro-independence Cuthbert’s have also argued against the currency union in their paper.
Wolf is of course primarily looking at the issue from a rUK perspective, but this is important because it takes two to negotiate and the Scottish Government claims such an arrangement is in the rUK’s interest as well. He adds another key lesson - a central bank responsible to several governments is accountable to none. As the rUK generates 90% of UK GDP the rest of the UK could insure Scotland, but Scotland could not insure the rest of the UK. As Wolf puts it, “This could not be a relationship among sovereign equals.”
This debunks the claim in ‘Scotland’s Future’ that: “An independent Scotland will be able to decide our currency and the arrangements for monetary policy.” Wolf describes this as ‘nonsense’. Even worse, Wolf argues that it would be necessary to impose fiscal discipline on Scotland, while the rUK would need to retain the ability to use fiscal policy in crises, as it did in 2008 and 2009.
He concludes, “It would be folly for the rest of the UK to enter a union with an independent Scotland voluntarily, having seen what has happened inside the eurozone. But, if it did indeed agree to do so, it would have to be on the basis of a view of its own interests. It must be an asymmetrical union. The BoE would remain subject to the law of the rest of the UK. It would not contain regional representatives. It would have sole responsibility for prudential regulation. Above all, the rules of the union would impose fiscal discipline upon Scotland. But such discipline would essentially be voluntary for the rest of the UK.”
“If I were Scottish, I would not dream of accepting such an arrangement because it would be far more unequal than the present one. But it is the only arrangement the rest of the UK should accept in return for participating in a worse monetary union than today’s. Mr Carney could not say anything like this. But the Scottish people should not be allowed to believe they can have whatever kind of currency union they want. It would find another and far bigger partner on the other side of the table.”
The currency we use is not an academic side issue in the constitutional debate. It is the basis for a credible monetary and fiscal policy. Plan B is long overdue!