SNP must seize on chance to address currency in an independent Scotland

That is the concluding sentence of the SNP’s Sustainable Growth Commission’s report. After more than 300 pages, it ends by admitting that its concept of sustainability is largely financial. Independence should accommodate the interests of Scotland’s professional investors.

It is not a bad aspiration. The asset management sector manages investments worth about £2 trillion, generates perhaps £15 billion in fee income, employs about 3% of our workforce and could contribute up to 5% of Scotland’s national income. Much of that will be through exports to the continuing UK.

This is one of the real strengths of the Scottish economy. But it is not the whole of the Scottish economy – and its wellbeing must be balanced against many other social interests.

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The Growth Commission’s proposals for the regulation for financial services are very supportive of the financial sector. There is always a danger that when governments appoint regulators to oversee an industry, they end up protecting the industry’s interests, rather than challenging them. It has happened with airlines, with telecoms and, of course, with banks and the wider financial sector.

There are good reasons to consider that to be a risk in Scotland after independence. Banks will have powerful voices – their own, and their lobbyists’. There is a history of close links with government. Ian Fraser, who examined the collapse of Royal Bank of Scotland, in Shredded, has written about an all-too-easy flow of people between banks, the Scottish Government and the SNP.

Ask bankers and ex-bankers to decide how banks should be regulated, and they will quickly reach agreement – but their shared experiences and beliefs mean that there is a danger that they will devise a system which works for the banks, and not for the country.

The SNP conference at the end of next week can firmly address this risk by passing a resolution to start a wide-ranging consultation on how to set up the Scottish Central Bank, which will be the banker to the government – and to commercial banks. As a first step, the resolution proposes that the SNP organises a National Assembly, open to all members, to consider the “regulation, culture, and practice of banking”. The National Assembly would report back to the SNP’s National Conference. Such open debate increases the opportunities for democratic scrutiny, giving some assurance that the final proposals will be robust.

This extensive, semi-public consultation should also settle unambiguously the question of the currency that Scotland will use after independence. The Sustainable Growth Commission favoured the use of sterling for an indefinite period, but probably for at least 10 years after independence.

The SNP’s National Conference has supported the adoption of an independent currency as soon as practicable. That could still mean waiting until Scotland meets the Growth Commission’s deliberately vague tests sometime in the distant future.

Alternatively, almost as soon as Scotland becomes independent, the governor of the Scottish central bank might confirm that all necessary tests have been met, and so authorise the immediate issue of Scottish currency.

That alternative seems straightforward, obvious, and while not riskless, only to involve manageable risks. In contrast, all sorts of uncertainties are thrown up by “Just use sterling”.

Many different currency arrangements are possible. Before the 2014 referendum, the Fiscal Commission recommended a free-floating, independent Scottish currency as the best alternative to the Scottish Government’s preferred option of a currency union. “Just use sterling” barely figured in the discussion.

The Sustainable Growth Commission claimed to be building on the Fiscal Commission’s analysis. I think that is misleading.

Instead, almost from nowhere, the commission came up with a new, largely untested proposal. It is supposed to be an imaginative compromise, offering the best of both worlds. It prevents the UK from refusing to be a partner in a currency union, while giving the unpersuaded the reassurance that almost nothing will change with independence.

Maybe this will work, but it leaves many complicated details to be negotiated after winning the referendum – and a big target for opponents of independence to attack until then. Supposedly, there will be a Scottish central bank, but the Bank of England will still be Scotland’s monetary authority.

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This is certainly an unusual configuration, perhaps appropriate for a colony rather than for a new state. As the UK Government’s banker, the Bank of England also provides the funding needed for the stability of the commercial banking system. It has these roles because there is effectively no limit to its ability to create money.

Without a Scottish currency, the Scottish central bank would have to accept the Bank of England’s interest rate policy. Suppose that the UK wants to push up interest rates at a time when Scotland needs them to be lower.

Something similar happened in the eurozone, when Greece needed bailouts. The UK would be able to humiliate Scotland. Of course, with no monetary union, Scotland could quickly acquire additional economic freedoms by setting up its own currency. It would be doing so hurriedly, to resolve a crisis. That will come with substantial costs, not least to the country’s reputation.

All that seems like massive, avoidable uncertainty, and running away from the sort of serious planning which will be needed for independence – and so next week’s SNP conference should agree to reopen discussion and finally get this right.