LAST week, the “currency question” was reignited by an article in the London Times purporting to prove (by citing unnamed sources) that an independent Scotland would be refused entry to the EU if it did not accept adopting the euro as its currency.
Scottish Tory leader Douglas Ross then repeated these baseless claims at FMQs, in a vain attempt to deflect the political spotlight from the travails of the imploding Conservative government.
As everyone and their proverbial uncle knows, the Maastricht Treaty, which governs the mechanics of entry into the EU and eurozone, imposes no timetable or rules on a new member state for joining the single currency. True, there is a required commitment to join at some nebulous point in the future. But the framers of the Maastricht Treaty knew full well that it was politically and economically illiterate to gainsay the future in such an arbitrary fashion.
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However, that does not get the independence movement entirely out of the political woods. Both the SNP and the current Scottish Government are committed to re-joining the EU after independence. Polling shows that the majority of No-to-Yes switchers are doing so because of Brexit and a desire to remain in Europe. However, there is strong evidence that voters are wary of abandoning sterling or joining the euro. Hence the de facto stance of the SNP that Scotland would sign up to Maastricht, but delay euro membership indefinitely – as have several current EU members.
That may be the pragmatic, political choice but it creates a moral hazard. Are our negotiators signing up for eurozone membership in theory because they have to but secretly intending never to join? At best, that is deliberately fudging the issue; at worst, it is duplicitous. And what happens when Scotland’s chief EU negotiator is asked point blank – as they will be – do you actually intend to join when the conditions are right or are you signing up for a commitment you don’t intend to keep? Whatever the answer, it will be the next day’s headline.
The answer to this tricky question goes to the heart of how we will govern our new nation. Will the politics of an independent Scotland be based on an open, honest dialogue with the people? Or will it start from day one with being disingenuous and manipulative? That’s a tough one. But we won’t win independence by deliberate subterfuge. And if we do, I fear for the type of new nation we intend to create.
Okay, we are independent and inside the EU: what currency then? Again the SNP, the Scottish Government and many adherents of independence will argue we need to keep the UK pound sterling pro tem. Again, this is to reassure wavering referendum voters who are worried about the impact of independence on their pensions and mortgages. Fair enough. But this currency choice raises its own difficulties. My beef is that these worries are being deliberately ignored in the name of the same pragmatism that governs the non-answer to the euro question.
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Take one example: if post-independence Scotland keeps the pound, the Scottish central bank will not be able to create reserves of the Scottish currency in any emergency. Specifically, it would not be in a position to pump emergency liquidity into a failing banking system. Quite literally, the central bank could not do what central banks exist to do; that is, to guarantee the solvency of the financial system. Indeed, one reason a nation needs its own currency is not so the government can spend what it likes but to act as a guarantor of financial stability. (Note: facile references to tiny jurisdictions using another nation’s currency don’t apply: Scotland is a major industrial economy with a sophisticated banking system.) My point is that the choice of keeping sterling after independence entails risks as well as political advantages. So far, there is a conspiracy of silence over these risks. I deem that another moral hazard – one that will become evident during the next indy referendum debate, whenever it comes. Better to discuss these issues now.
Which brings us to my next point: the SNP government’s stated rules for adopting a separate Scottish currency “when practicable”. This involves a new Scottish central bank advising the then Scottish Government that an agreed set of criteria for maintaining economic and financial stability have been met, so it is safe and prudent to move from sterling to the new local currency. This procedure is designed to reassure the business and international banking community that the introduction of the new Scottish currency is not some reckless political experiment. And, supposedly, it will keep the financial markets happy in the meantime.
But this mechanism effectively offshores the decision to introduce a new currency from elected politicians to unelected, partisan technocrats and bankers. How is that an example of democracy? On several occasions, I have been told that I should not worry. The eventual decision to introduce a new currency will be taken by the Scottish Parliament itself – the central bank can only “advise”. If so, I fear we are creating another moral hazard.
Are we really saying that the Scottish Parliament will reject negative advice from its own central bank? If so, why have these rules in the first place? Besides, rejecting the central bank’s advice would only trigger a rebellion in the financial markets that would scupper the Scottish Government’s financial credibility. Personally, I am not in favour of giving central bankers a veto. But equally, I don’t think you can say one thing and intend to do another. This means the introduction of a Scottish currency will be determined by outside forces and might never happen.
All of which raises a final question: why not just join the eurozone as soon as possible after independence, and skip the stage of introducing a separate Scottish currency? The technical reply is usually that a candidate country has to have its own currency in order to manage the convergence process with the euro. That’s true formally, but then no new (and economically significant) state has entered the EU in the same circumstances as Scotland. If we did enter membership negotiations, stating – from day one – that we wanted to fast-track to eurozone membership, is it reasonable to imagine that Brussels would say no?
Many of these problems disappear if Scotland, on independence, opts to join the European Free Trade Association alongside Norway, Iceland, Switzerland and tiny Liechtenstein. The EFTA countries have access to the EU Single Market, which would guarantee Scotland the free trade arrangements it seeks with Europe. We could then introduce our own currency quickly to provide financial stability.
If the independence movement rejects the EFTA option – on the grounds it wishes to win over the support of anti-Brexiteers – that is a perfectly rational political choice. But it is a choice that cannot be made disingenuously and hope to succeed. I fear the “say euro, but really mean the pound indefinitely” stance will unravel during the forthcoming referendum. And the currency question certainly won’t go away during any EU entry negotiations – it could become a pivotal discussion point.
To enter the currency debate saying one thing and meaning another is to court disaster.
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