An answer to Michael Moore’s six questions: part 2

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by a Newsnet reporter

In yesterday’s article I sought to provide an answer to the first of Michael Moore’s questions for the Scottish Government to answer.  Today I will deal with the second question:

“Which currency would Scotland adopt and how could entry and influence be guaranteed.”

Let me start with a disclaimer lest my amateur scribblings come to the attention of the aptly named “spivs and speculators” who inhabit our financial markets and who thrive on rumour.  I would not like to be the cause of a run on Sterling.  The closest I have come to knowing what is in the mind of the Scottish Government on the matter of their choice of Sterling as Scotland’s currency is that John Swinney walked past me in the Thistle Centre in Stirling this afternoon.

Why has the SNP declared so emphatically that they propose to stick with Sterling?  Why, when they espouse the virtues of independence would the SNP be willing to leave monetary policy, which is one of the most powerful tools available to a government to manage its economy, in the hands of another  government whose interests will not necessarily be aligned with those of Scotland?

The SNP generally takes a pragmatic approach to dealing with issues and with that in mind I suggest that there are three answers to these questions:

1. Any hint that Scotland will pull out of Sterling will make our common currency the primary target of speculators in international financial markets, with holders of Sterling fleeing to what they perceive to be safer currencies.  There could hardly be a worse time for this to happen than now and it will severely damage both the English and Scottish economies.  Scarcely a propitious way to embark on independence.

2. More than half of our exports and imports are with England and our common border ensures that this will most likely continue to be the case post independence.  Any significant divergence in the relative values of the currencies of such significant trading partners would disrupt existing market arrangements and do widespread damage to industry and service providers on both sides of the border.  Why shoot ourselves in the foot?

3. The SNP have said that they will remain with Sterling.  What they have not said is under what conditions.  That is the real question Michael Moore should have asked, namely: “What will it take for Scotland to choose to remain in a currency union with England, Wales and Northern Ireland.”

The clock is ticking on the countdown to the independence referendum.  The Westminster Government would better serve both the nations of Scotland and England if, instead of continuing to indulge in their age old colonial strategy of divide and rule, they sat down and started some serious negotiations with  the Scottish Government on the future structure and management of shared institutions which it is in the best interests of both nations to continue.  A case in point being the Bank of England and the Pound Sterling.  Clearly if the Scottish Government is going to agree to the Bank of England continuing to hold sway over Scotland’s monetary policy then the Scottish Government will have to be part of the policy and decision making structure of the bank.

Should the Westminster Government continue to pursue its current intransigent policies then what other options are open to Scotland.  Potentially there are three:

1. Scotland issues its own currency and pegs its value to the Pound Sterling at parity.
2. Scotland joins the Euro
3. Scotland issues its own currency and allows the value to float on international currency markets.

Option one retains most of the advantages of the present currency union and in fact already exists in embryonic form with the right of the Scottish banks to issue their own notes.  What happens with the note issue is that the Scottish Banks have a relatively small fiduciary issue which is dependent upon the banks’ own balance sheets and the remainder of  their note issues are secured by the deposit of cash or securities with the Bank of England.  A pegged currency operates in much the same way with the demand liabilities of the central bank issuing the currency being covered to a specified extent, probably something upwards of 60%, by investments in the currency of the country to which it is pegged.

This would be a viable option in the event that the Westminster Government will not play ball with the Scottish Government on a workable currency union and would be on a par with Sterling in terms of Michael Moore’s benchmarks of “entry and influence.”

Option two, Scotland joining the Euro would not be the best choice at this time and would lead to that divergence of currency values between the pound and the euro that would disrupt existing market arrangements between Scotland and England.  If in due course the euro zone should stabilise and gain strength then the Sterling area may well seek entry at some future date.

Option three, Scotland issues its own currency and allows it to float on international currency markets.  Although Scotland has a fairly diverse economy there would be a perception that it is commodity-based with the main commodity being oil.  Our currency therefore while retaining its underlying strength would likely see fairly wide swings as commodity prices fluctuated depending upon supply and demand.  This would create a difficult environment for our exporters and cross border service providers.  While there are some undesirable aspects it nevertheless remains open to us as another viable option and given the track record of the SNP Government in managing the economy plus Scotland’s oil there is little doubt that a floating Scottish currency would be able to meet the “entry and influence” criteria.

The bottom line is that it all comes down to negotiation, negotiation, negotiation.  The Scottish Government has made it clear that this is their chosen route.  I suspect that it will be the eleventh hour before it finally dawns on Michael Moore and his Westminster colleagues that the Scots have had enough of their divide and rule tactics and while we might prefer to preserve those aspects of the Union that can continue to play a role in the future development of both countries.  It will not be at the diktat of Westminster.  We have other options and will pursue them if needs must.

Michael Moore’s remaining four questions are largely matters of negotiation and administration and I will take them together in my final article on this subject tomorrow.