Currency

February 11, 2014

5. No need to beg for pounds

 

“We do not accept Groats.” This is the pub-window sign of Better Together's wet dreams. Better Together types perpetually call an independent Scottish currency the 'Groat' to much the same effect that British Empire types called the people from the nations they invaded 'wogs'. The purpose is to demean and debase, to present the 'not British' as backwards, medieval, incapable of functioning in modernity. It also contains within it the important idea that Scots will be isolated and cut off, that our money won't be worth anything.

 

Scotland has never had a currency called the 'groat'. Nor has anyone else in the world. The groat was the name of a coin like tuppence or shilling was the name of a coin – and it was also the name of a coin in England. There is no historical case of any description for our currency to be called 'groats'. It is a crude anti-Scottish insult and no more than that. I don't even feel inclined to have to defend the idea that if Scotland had an independent currency (and a petro-currency at that) it would be a strong currency in international terms. Nor do I feel the need to describe the many small countries with currencies not used by their neighbours – how do the Irish, the Norwegians, the Danes survive their dreadful isolation? One assumes they must be starving to death, unable to buy gruel with which to feed their peasants.

 

What is sad is that on the subject of currency and an independent Scotland the debate is pathetic – and both sides have some complicity. It comes from some crude polling that shows people are nervous about changing currency. No is desperate to play on that fear, Yes desperate to placate that fear. When independence supporters talk about currency, other independence supporters whisper in their ear 'careful, don't scare the voters'. So there is no discussion.

 

In these few paragraphs I have no intention of coming to any firm conclusion about what currency an independent Scotland would have and nor do I have time or space to try to explore all the possibilities and their implications. But I do want to make clear that there are choices – and they're most certainly not all bad.

 

Sterling is the first option. The plan is that we agree a Sterling Zone deal that lets us keep Sterling in exchange for accepting terms. We keep ease of financial transactions across the borders of the former-UK and don't have to take any real responsibility for managing a currency. We then have very little control over monetary policy and may come under pressure on how we manage our public finances. We are stuck with a currency that is bad for manufacturing and export and is designed and run primarily for speculation, but that is the price for knowing what we're getting. However, the real reason for Sterling is about shoring up people's nerve.

 

Using Sterling without a Sterling Zone agreement is the next option. This is mainly put about by Better Together people because it is an arrangement usually only used by developing nations. It usually requires large currency reserves to be held by the nation using the currency and certainly means that there is no control whatsoever over monetary policy. Then again, that is the situation if there was a Sterling Zone and it is also more-or-less the situation now. Despite all the bluster from the Unionists, there is no democratic control over monetary policy as things stand now. That's what 'independence of the Bank of England' means.

 

The next option is usually skipped over altogether when this issue is discussed, the narrative jumping from Sterling straight to Groat. But before we reach a free-floating Scottish currency there is the option of a Scottish currency managed as a fixed exchange rate currency. In this model Scotland would create a new currency called the Scottish Pound. It would be identical to Sterling and we would peg the value of the Scottish Pound to Sterling. To do that you need to have a large foreign currency reserve. When the Scottish Pound becomes too strong in comparison to Sterling you sell your reserves of Scottish Pounds to depress their value. If Sterling became to strong you buy Scottish Pounds and this increases their value. This is a fairly common international practice. It does reduce some of your monetary policy and economic options (you have to work a bit to keep you currency at the right exchange rate) but it constrains policy much less than a Sterling Zone would.

 

The crucial thing about this option is that we would need to decide to do it at the outset if we were to get the best deal. If we do not get Sterling then (as I keep pointing out relentlessly) we have no obligation to accept any of Sterling's debt. If we were not getting access to this asset then we would convert a large chunk of our share of UK debt into a foreign currency reserve fund by not taking the debt but instead borrowing to buy international currencies. So we'd get all the foreign reserves we needed to peg the currency instead of getting access to Sterling. This is a trade off that I believe would be very beneficial to Scotland (though not so much for the rest of the UK). But it is a serious option.

 

Next after that is a free-floating currency – a Scottish currency that does its own thing completely. That would almost certainly be something you would do only after you had pegged your new currency to the pound for quite a while. So in effect it is an evolution of the previous option. We are presented it as a 'dive in at the deep end' option to scare us. It might be 20 years before we allowed the fixed exchange rate policy on a Scottish Pound to end and allow the currency to float freely.

 

Finally (for now), there's the Euro. This option was abandoned mainly because of perceptions. There were lots of British commentators who expected the Euro to collapse. They were wrong (not that it has stopped them offering their opinions on Scotland's currency). In fact the whole Euro 'crisis' had barely altered the exchange rate between the Euro and Sterling and certainly no government in Europe has had to run up anything like the debt that Sterling has to bail out its currency. The Euro crisis came at just the wrong time for the independence campaign – were we starting now and not three years ago we might well have the Euro as the leading option. It has attractions for a new state (we don't need to manage the currency, it's a broad collaboration rather than the junior partner status that Sterling would impose, there is little uncertainty). And it potentially has a particular attraction for Scotland. If we get independence right, Scotland should go from being a top 30 exporting nation to a top 20 exporting nation. That would potentially make our currency very strong indeed. Germany has benefited greatly from having the Euro precisely because it has meant the currency used by Germany is significantly undervalued in relation to the German economy. A strong economy should see the value of its currency rise, making exports less competitive. But Germany has had the southern European nations effectively depressing the value of the Euro meaning Germany gets to have both a strong exporting economy and an undervalued currency. Win win for the Germans. There is more than a hint that Scotland would be in the same position. Ruling out the Euro because of a crisis that didn't quite happen and now looks to be in the past could be a serious mistake for Scotland.

 

My rough conclusion from all this is that probably Scotland would benefit from a transition period in which we use Sterling – but it is far from clear to me that we benefit much by agreeing a Sterling Zone rather than just using Sterling for a period. But I think the establishment of a Scottish Pound pegged to Sterling is perhaps the better option if we have the nerve to go for it. Either way, it should be a matter of time (and not much of it) before me migrate either to our own currency or – just possibly – to the Euro.

 

All this is just to say that we have loads of good options and frankly not that many bad ones. These are decisions we don't need to make right now – but it would almost certainly be better if we had the debate right now. The problem with following polls that say people are nervous about leaving Sterling is that it guarantees that they won't hear about the potential benefits of leaving Sterling and so their minds will not change even though there are very good arguments that might well persuade them.

 

But that's not what this blog has been all about. This blog is about bluffing. In negotiating Scotland's terms of separation some people may have thought that my argument that we could walk away from Sterling as a baseline negotiating position is a bluff. It most certainly isn't. It is a very real proposition indeed. What I'm trying to show is that if we can make the option real, it puts Scotland into the prime negotiating position.

 

That's what is important about us talking about a Scottish pound. At this stage its not about trade but about negotiation. Not the money in our pocket but the weapon in our hand.

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