This article by me was published in The National in Scotland, yesterday:
I FOUND Ivan McKee's article (The people of an independent Scotland make the decision on a new currency, June 25) in The National a little disappointing. I am sure McKee has good intentions in following the SNP line on the Growth Commission report, but much of what he says is misleading for those who are not terribly well informed on the significance of a country having its own currency. He also makes a number of claims about other countries that are not supported by evidence.
McKee's main argument is that Scotland may end up with its own currency at some point after independence but that will certainly not happen on independence day, and may not for any considerable time thereafter. Instead, he argues Scotland should follow a policy of “sterlingisation”.
What that would mean is that Scotland would use the pound as its currency although it would not be in formal currency with the rUK. In other words, although it would use the pound it would have absolutely no say over any policy that the Bank of England may wish to adopt with regard to it.
McKee claims that such a policy is not surprising for a small state, noting that “five of the 12 countries the Growth Commission learns from — Austria, Belgium, Netherlands, Ireland and Finland — don't have their own currency”. This is a little disingenuous. Those five states are all members of the EU, with which they are in monetary union. They are not pursuing a policy of what might be called “euroisation”: they have active engagement with the currency they use as a result, including representation on the European Central Bank. In exchange they have agreed to give up part if their independence to achieve this goal. That is a policy nothing like sterlingisation.
Of the other countries McKee notes, two have their own currency but keep its value tied to another — Denmark to the euro, and Hong Kong to the US dollar. But again the comparison is disingenuous. In the case of Hong Kong that is because it is hardly independent of China, which can provide it with the resources to track the dollar.
And Denmark does not make his case: the reason why it must retain considerable foreign currency reserves is precisely because that is the cost of maintaining its currency's peg to the euro.
If it did not do that and instead let its currency “float” it would require vastly fewer such reserves, as would also be true of Scotland if it let its currency float. And McKee should also let the Greece analogy go: no one is seriously comparing Scotland and Greece, which is in a special situation largely of its own creation.
Having dismissed these comparisons let me get to the core of my case. McKee says that having a national currency isn't a prerequisite for “real” independence.
Unfortunately he is wrong: that is exactly what the prerequisite of real independence is. Without its own currency Scotland would not be truly independent, most especially from the rUK. Let me just list the things over which it will have no control if it pursues sterlingisation.
Scotland would not have an effective central bank, which many see as key to economic policy. You can't have an effective central bank without your own currency.
As a result Scotland would have no control over the amount of money circulating in its economy, and so will not be able to use that control to influence the economy, including its inflation rate, which will be entirely beyond its ability to address.
Nor will Scotland be in control of its own government budget, so it would not be able to stimulate the economy by running a deficit, for instance. That is because the Government would be forced to balance its books unless it borrowed in a foreign currency, which would make it hard, if not impossible, to maintain parity with the pound.
And Scotland would not control the interest rate at which its government and the rest of the economy borrowed money and would instead have those rates (and other conditions) imposed upon it.
In other words, for all practical purposes, the Scottish Government would have no effective control of any of the measures used to control its economy. In fact, it would be worse off than it is now. It would have, post independence without its own currency, about as much power over the economy of Scotland as a local council has over that in its district, which as any councillor will tell you is minimal. It's fair to say that such a Scottish Government would be in office but virtually powerless. It is very hard to understand why anyone wishing for independence would wish for that.
And there is no reason for this policy of sterlingisation. First, it is not possible, as McKee suggests, to claim that Scotland could not have its own currency on the day of its independence. As Robin McAlpine has made clear, setting up a new country is not something that is going to happen overnight. It will take at least three years to achieve after a vote for independence: to suggest anything less is simply not plausible. In that case it is entirely possible to have a functioning currency on the day of its independence.
Second, let me address the underlying fear that underpins sterlingisation, which is that the new currency will suffer a market challenge on the first day it is in operation. To this my answer is, it might. That is possible. That is the sort of game financial markets play.
The Scottish currency may rise against sterling or it might fall a little. But let's put this in context. Sterling lost 10% of its value ppost-Brexit and inflation just about exceeded 3% as a result. That inflation was not a national disaster.
And nor would such a cost harm Scotland, and a 10% variation stretches the likely devaluation to its plausible limits. So I suggest that wise politicians should accept that such risks exist and simultaneously make clear that it is not worth shackling the welbeing of a country to prevent it happening. Instead they should say that it is the fear of markets and the shackling of the economy to measures that pander to them (such as austerity) that is precisely what makes countries vulnerable to such attacks.
A strong Scottish Government with its own currency, with clear willpower and the economic freedom to act in the best interests of the country can ride out such storms with ease because the policies of such a government will be economically fundamentally sound and it will, because it has that currency, have the full range of measures it requires to implement them.
But Scotland without its own currency will be in the exact opposite position; it will be fundamentally economically weak, forever destined to run every aspect of its affairs with the sole goal of “keeping parity with the pound”.
What a sorry country that would be. The SNP has to be wise enough to reject such a prospect. I hope its membership is.
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Thank you for that Richard. There is a real need for MMT economists worldwide to speak out, and to write about this. It is the critical issue in Scotland.
The problem is that the SNP has built its reputation with an essentially conservative electorate (small ‘c’ but large resistance to change) on the back of a very pure form of ‘managerialism’; operating the prevailing ‘system’ at a level of competence above its political party peers (not managerially especially difficult as a comparative over the last fifty years, but the “optics” – the ease of spoiling media propagandising – makes it difficult); hence for example they have embraced GERS, and the tenets of Neoliberalism, because they are conventional; it is a difficult habit to break.
One small point I hesitate to mention when you are feeling ‘sub-par’; but:
“Scotland would not have an effective central bank, which many see as key to economic policy. You can’t have an effective central bank without your own currency.”
This is fine, but it is worth pointing out that the apparent corollary does not follow. Having your own currency does not ensure that you possess an effective Central Bank.
John
All agreed
Including your last point
You cannot imagine how little time was available to write that article….
Richard
Isn’t the issue here primarily political, in the sense that first and foremost a referendum must be won? The political calculation will be that winning that referendum becomes much more difficult if attached to a new currency proposition.
In economic terms the UK is (like it or not) a single highly integrated economic / currency area. Most of those voting in a future Indyref will have savings (including ISA’s), investments, pensions & mortgages, along no doubt with various secured and unsecured debts, all denominated in Sterling. Not to mention many working in the private sector for identifiably ‘rUK’ rather than ‘Scottish’ employers. At a stroke their entire financial existence becomes denominated in a ‘foreign’ currency, introducing complexity (for sure) but also uncertainty and considerable financial risk.
For example, if a new currency loses 10% of its value against the currency in which your mortgage debt is denominated you’re not going to be very sanguine about it, the same issues will arise across all other areas where you’re tied into Sterling. In other words, a guaranteed Indyref loser?
Haven’t we had enough referenda won on the basis of misrepresentations?
And incidentally, you won’t give a damn about your mortgage being revalued: the liability would be in Scottish currency
Had enough of referenda full stop – only serves to spilt nations. Scotland will continue to pick the scab of independence until the SNP get the result they want. Same with Brexit I suppose. I would prefer the SNP tried running the country properly though. Made a bit of a pigs ear of it so far. No idea why you idolize them so much.
I discuss independence
That’s not a party political issue
Yes it is – the sole purpose of the SNP is indepedence for Scotland. They exist for no other reason. The other 2 parties take an opposite stance. I am but a simple person but it seems a political issue to me. Notwithstanding your dream of an economic experiment in Scotland. May work , may not but it will not affect you in Englandshire so hey ho.
Other 2 parties?
Do you know anything about politics?
Or Scotland?
Michael says:
“I am but a simple person but …..” No buts here Michael 🙂
“Yes it is — the sole purpose of the SNP is independence for Scotland. They exist for no other reason. ”
Yes and no. Certainly that is the philosophical underpinning of the party and the reason for its existence, but independence isn’t some ‘thing’ that will be delivered so that we can all have a party and then carry on as before. You could perhaps note that even after ten years in power in Holyrood their approval ratings in opinion polls (something I distrust on principle) are surprisingly high. Ten years in government is usually long enough for an electorate to be looking around for another set of manifesto promises to get behind. Even if they know in their hearts the promises will never be delivered….a change is lightsome even if it’s only from the bed into the beck.
A lot of the electorate in Scotland is very happy to see a government in Scotland which is providing a bulwark against the depredations of Tory Austerity. We do still have an NHS and it’s doing rather better than in rUK by most accounts, despite budgetary constraints from Westminster. We still haven’t had to cave in to the utter nonsense of university student loans (the only beneficiaries of which are the money lenders), We don’t have bridge tolls, or prescription charges, and elderly care provision is widely reckoned to be better than in rUK. So much so that English (Tory voting) people seem to be attracted to retire here. And the SNP is unwinding PFI contracts. And we still have our own water industry for the consumer rather than the banks.
“The other 2 parties take an opposite stance.” [ That would be the greens and the Lib Dems you’re referring to ….?]
“it seems a political issue to me.” Of course it’s apolitical issue. What isn’t a political issue ? Presumably you mean it’s not consistent with Conservative, conservative, establishment, orthodox dogma which is simply never ‘politically inspired ? Get real.
” Notwithstanding your dream of an economic experiment in Scotland. May work , may not but it will not affect you in Englandshire so hey ho.”
We know MMT works if that’s what you’re referring to. If it didn’t there wouldn’t have been a bank or a financial institution left standing in the wake of 2008.
Englandshire will follow suit when Scotland shows the way. That will be greatly to Englandshire’s benefit in the medium to long term. Certainly to the benefit of a demoralised, benighted and confused populus.
Grow some and vote for independence and control of your country, if indeed it is your country. If it isn’t your country and you would rather it belonged to somebody else please butt-out.
Rod,
For better and worse what you’ve offered is a conservative unionist argument based on short-term self-interest. It is perhapsbetter to be honest about that than pretend that its about currency.
And for the record Andy it is my country – is it yours?
It’s not RM’s and he seems not to ‘butt out’ to use your terminology. But since he just echos your views ( sorry you echo his ) he is allowed. Typical Nat – get out or agree. I first came across the Nats at Edinburgh Uni in the mid 70’s. They were not an impressive bunch. So no change there then.
Thanks
That abuse comment sees you banned
I suspect that those Nats were deeply unimpressed by you
Rod Masson says:
“Isn’t the issue here primarily political, in the sense that first and foremost a referendum must be won? The political calculation will be that winning that referendum becomes much more difficult if attached to a new currency proposition.”
I don’t think this is clean politics. I know it’s the norm these days, but the point of presenting a manifesto is that the demos knows what it’s voting for.
The ‘Leavers’ won the Brexit referendum on manifesto promises that were a tissue of lies and fantasy. In the past week or so Theresa May has doubled down on the lies by pretending that she can deliver on the Boris bus £350 million Brexit dividend to finance the NHS.
This makes a mockery of democracy.
I don’t want to see Scotland starting a new future on a manifesto of bullshit. What would be the point ? Once you start lying the lies get ever more convoluted until you have a system of doing politics like Westminster, where nothing that is said bears any relation whatsoever to reality or truth.
There is a very cogent case for an Independent Scotland, and part of what makes it viable is currency sovereignty. The case needs to be made. Voters need to be persuaded that the people who trot out half baked lies like the disinformation you are recycling are supporting a broken economic model that leads nowhere good. It is inherently anti democratic.
Indy ref will be a pushover, a no brainer when voters understand what is at stake. This isn’t a left-right contest it’s an existential battle for democracy against elite rule.
A few people will support nanny knows best elite rule, especially if they are nanny’s favourites and doing very well, It makes them feel secure. I don’t believe they are the majority, but a referendum may prove me wrong. (Again)
Andy,
You’ve used my quote, which was the essence of my post, but what do you mean by ‘dirty’ politics?. (which politics are ‘clean’?)
I would suggest pragmatism is the essence of politics and the SNP approach is nothing if not pragmatic. I suggest that the likelihood of a new currency offer being included as part of a 2nd referendum is negligible because it would greatly reduce the chance of winning that referendum.
Regardless of the merits (or otherwise) of a new currency it raises too many awkward questions, creates too much uncertainty, therefore it won’t happen…?
It’s precisely why the last referendum was not won
But don’t let that get in the way, please
Which politics are clean, Rod Masson ?
Well not many, but that’s nothing to proud of and I don’t think we should be.
I’d rather see independence stay on the back burner until the case is understood, and won on a realistic prospectus, than see see a population bamboozled even if ‘it’s for their own good’. Which I don’t think it will be if future Scottish governments are hogtied to Sterling (or heaven forfend, the Euro) and in hock to banks and ‘big money’ interests.
I voted for a ‘pragmatic’ New Labour government. I won’t make that mistake again, and I hope a lot of other people have learnt the same lesson. I see John McDonnell manoeuvring into a position where Labour is seen as ‘electable’, but what’s the point if the country is still going to bagwash, but under a different banner ?
Ivan is a gifted speaker, a great motivator, deeply committed to independence and, usually, smart about economics – but you are absolutely right and Ivan has got this badly wrong. The so-called comparators are nothing of the sort – indeed their inclusion in his argument is ridiculous. Of course, it is true that ‘sterlingisation’ could be followed – so could other daft nostrums – but that it would be terminally unwise to do so is not only true economically and in terms of control of an independent Scotland’s policy, for the reasons that you give, – but it would also be a political error to push this in an independence campaign. Indeed, it could possibly be fatal to that project.
One of the biggest – perhaps the biggest, as the economic shambles of Brexit’s self-harm becomes ever more apparent – drivers of a new YES majority will be the desire to escape the current UK government’s helpless economic mess. In any way at all, seeming to tie Scotland’s future to the Brexitanian pound, would be a huge own goal. It would, for many people, viewing the uncertain change – Brexitania or independence – which voters will face, be the final nightmare – to be stuck with the embattled and isolated pound whatever they did. The politics of a second Scottish referendum will be very different from the first- and independence from (I wish I could underline that word) Britain and its pound will be the only thing that will make political motivational sense.
Thanks
Nigel Mace says:
“but it would also be a political error to push this [currency issue] in an independence campaign. Indeed, it could possibly be fatal to that project.”
I Agree entirely. Which is why my position is that there is a lot of work to do in explaining the realities of the economic prospects to the electorate BEFORE an independence campaign begins.
Under Tory austerity rules, Scotland continues to stagger on, I see little point in being ‘independent’ in order to have no option but to continue the same economic stupidity in hock to an unsympathetic Westminster government and the banking and fiance interests that control it and which it represents. (irrespective of which ‘side’ is sitting on the government benches)
Radical independence proponents don’t seem to appreciate that there is no tearing hurry to get a referendum. The logic of independence will gradually turn the tide of knee jerk reactionary opposition and David Cameron was (despite being ‘a twat’ in some peoples’ estimation) quite right to call indyref1 before the independence case was understood.
I’m banking on Nicola Sturgeon having learnt from Alex Salmond’s mistake in agreeing to a referendum on the terms and timing of of the opponents choosing.
Hear hear.
If I was a Scot I would probably I look favourably upon the idea of independence but not without a sovereign currency. I would rather remain part of the UK than have “independence” with a British pound.
“Sterlingisation” would leave Westminster and Threadneedle Street with most of the power and none of the responsibility.
An independent Scotland need not adopt its own currency – or, more likely, the Euro – immediately after Independence Day.
They can wait, and they are *already* have “absolutely no say over any policy that the Bank of England may wish to adopt”.
Public opinion will shift in favour of adopting the Euro if or when their economy becomes dominated by trade with the EU, rather than with England.
Or, of course, following some act of blatant economic hostility by the Bank; or, more plausibly, by Westminster.
The euro would be just as bad
Nile,
That is the most cluelessly, wilfully uninformed comment that I have read in a long time.
After everything that has happened with the euro: the German mega-surplus, the Greek debacle, the sovereign debt crises in Spain and elsewhere, to think that someone like you could come out with something like that.
There’s no point in explaining all that (not even briefly) as you are either determined not to understand or incapable of doing so.
I too was a little surprised
Nile says:
“An independent Scotland need not adopt its own currency — or, more likely, the Euro — immediately after Independence Day.”
“…… or more likely the Euro….. Not if I can do anything to stop it. The Eurozone is a basket case. If the prospect is to adopt the Euro I’ll vote against independence. It would be suicidal.
That’s not the same as being against a close relationship with the EU. I’m in favour of that, there are many non-pecuniary advantages, but if the choice is all or nothing (where all includes the Euro) I’ll vote for nothing. In reality that is a false choice.
The notion that EU membership is a one size fits all package is simply not true. The Nordic countries (and others) each have a unique membership arrangement and Scotland will have its own bespoke package in time.
I’m appalled by your suggestion.
Sure there will be some blatant bloody-mindedness from the BoE and Westminster, but that is precisely why there needs to be the Scottish Poond.
Day one of the currency is day one for independence.
It’s a curious article.
He makes the point that Germany and France are part of a currency union without mentioning that they were the first countries in it to break the rules …because they have enough clout to do so when they needed to. Italy also is big enough to have flouted the rules on bank bailouts not very long ago. Greece doesn’t get that option and maybe Greece was author of much of it’s own crisis, but it is tied into constraints that make it nigh impossible to get out of their mess. Their state is in hock to German and French banks in effect. With no end prospect in sight. While Iceland, in arguably worse trouble, after 2008, but with their own currency, turned themselves round in a couple of years.
Scotland need not have been suffering ten years of Tory austerity if not tied to Westminster policy.
The lesson of the UK departure from the ERM is an argument to have an independent currency rather than be tied to Sterling. It’s a piece of project fear grade nonsense to cite that as a reason to stay close to nurse. Black Wednesday was mostly down to old fashioned English hubris (willy waving I’d call it) entering the exchange rate mechanism at an unrealistic exchange rate.
Denmark is a straw man comparison. It needs its large reserves to maintain its pegging to the Euro. Another contra indication in effect for Scotland because Scotland would need similar reserves to maintain a Sterling peg. Better off without it I’d have thought; better to float rather than drown every time.
As I say… it’s a curious article in which he lines up all the ducks for an independent currency then wanders off to shoot a squirrel.
Very odd. Perhaps he was being provocative, but I can’t imagine why.
Perhaps he wanted a job
Andy,
I don’t know much about Ivan MKee. He seems to attract some sort of respect in certain quarters. Going by his article however all that I can see is thorough foolishness.
To ignore the horrors of the Eurozone: the massive trade imbalance and asymmetric shocks, the sovereign debt trap, failed convergence on interest rates etc. That’s one thing but to bizarrely misrepresent all that as some sort of a positive. That author is not an asset to the Scots cause.
I can only think that he and others like him are so desperate for independence that they are trying to avoid anything that may present difficulty (politically or otherwise). That’s not how achievements are won. They can’t dodge the hard parts. To do so isn’t worthwhile.
Marco Fante says:
“I don’t know much about Ivan McKee….” Well, no, neither do I, I’m just going by what he’s written.
There are a lot of people in Scotland who want independence at any price, but I think they are playing a dangerous/foolish game. Independence in name only will be a hollow victory.
It’s one thing to paint a vision of sunny uplands (complete with herds of peacefully grazing unicorns), but the clue is in the ‘up’ part of uplands. There’s a hill to climb to get there.
I have just come across this site and am slowly looking at various articles, so far many have been informative, as also the comments section. But I have a question;
“As a result Scotland would have no control over the amount of money circulating in its economy, and so will not be able to use that control to influence the economy, including its inflation rate, which will be entirely beyond its ability to address”
The B of E may have the ability to determine the amount of actual currency available, but as for money [or should one say credits on a balance sheet] They the B of E appear not to have any control.
Yes they can raise Interest rates to make the cost of borrowing more expensive, but not much else?
I seem to remember a time when the Government [of B of E] I am not sure which used to set;
A length of time one could borrow to buy a car for example, and/or how much money you had to provide as a deposit.
Ditto for House purchase Mortgage and repayments linked to actual [not fictitious] incomes.
Or am I mistaken that manufacturers appear to sell finance deals to punters and not actual goods.
==================================
I am currently reading an article. Posted on June 28 2018 and it’s comments section which may or may not be on a similar vein, so if I have posted it in the wrong section, please accept my apology.
Deputy governor Jon Cunliffe told BBC radio this morning that he’s concerned about families with high debt levels.
Cunliffe warned that some households have run up worrying levels of debts, which could drag them into a crisis if the economy sours, saying:
Re your overall question QE is government made money. And so are gilts. It’s true there is not 100% control of credit, but you have none at all without your own currency.
Peter Mills says:
“…am I mistaken that manufacturers appear to sell finance deals to punters and not actual goods.”
I’m not sure about that, but it certainly seems so, particularly in the vehicle market and that for white goods, where the important part of the transaction seems to be to get us to sign up to the extended warranty deal.
Thanks for addressing this again richard.
MSPs tend to tow the party line, so I’m thinking that the SNP are fully supporting the GC rather than merely holding it up as another option.
My ex MP has been ‘on the road’ promoting the GC too. It seems they see this as being the only show in town.
Worrying.
Indeed