As The National newspaper has reported in Scotland:
The National can reveal that an independent Scotland will establish its own currency, according to proposals to be voted on by SNP members at next month's conference. The major policy change for the SNP will be tabled by the party's depute leader Keith Brown and Finance Secretary Derek Mackay and promises to be a big focus of debate at the Edinburgh event — expected to be dominated by building the case for independence.
But the move is not what it seems. As they add, the plan is that:
preparations would begin during the transition period before Independence Day and would allow the new independent Parliament to “take a decision on establishing a new currency by the end of its first term”.
That, it has to be said, is vastly better than Growth Commission plan. But if the SNP is serious about independence it is not enough. Any period using sterling would be deeply damaging to a newly independent Scotland, meaning it could not create its own economic, monetary and fiscal policies, in turn meaning that it might well have less real power than Holyrood now because the reality would be that all power would lie in London. What is more, under EU rules it has to have its own currency to apply for membership. So it would fail there too.
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Hang on a second. Scotland exports £45bn of goods/services to the rest of the UK, and only £13bn to the EU. Yet you think an independent Scotland should be in the EU, when the rest of the UK is not? And required to have a hard border and tariffs etc with the rest of the UK?
The level of denial here is the ERG in reverse.
If necessary, yes
But the rUK (England) will do a deal
It will be desperate
You should consider what the £49 billion of export to rUK actually are. So a little over £20 billion is electricity and petrochemicals (not including crude oil and gas, which are excluded from the Scottish Exports figures). Neither of those will be affected unless rUK wants the lights to go out, and in any case they go by cable and pipeline for the most part. Of the rest much is services, e.g. banking, insurance, investment advice and the like. Those don’t involve goods and are also unlikely to be much affected. So you then get to the actual physical goods and when you look at the major Scottish export categories then e.g. for Whisky rUK is about 6% of the total. For Food & Drink in total (which is one of our most important sectors, especially for the whole of rural Scotland) then nearly 50% goes to the EU and rUK is a relatively minor component.
Having our own currency just means that exactly as in Canada companies (and people) who deal a lot with rUK will simply retain a Sterling account, card machine, etc in addition to their Scottish Pound new account. We work with several Canadian companies and none of them have any problem dealing with US clients (and many Americans don’t even know there are currencies other than the dollar!).
Scotland (and Ireland) is one of the very few countries where rUK probably exports more goods than it imports. Are they seriously going to chop off their nose to spite their face? Anyway under both EU and WTO rules they are not allowed to treat Scotland any worse than other trade partners.
Thanks
Let’s not forget that the GERS figures are questionable, to say the least.!
Timothy, I’m not querying your numbers for Scottish exports to rUK, but wonder what the source is? I’ve done a lot of work on GERS and was staggered by how little firm, Scotland-specific data they contain, with most values being estimates or allocations of UK-wide data from multiple sources. Until the new Scottish Gov Statistics Dep’t is up and running and has produced a few years’ reliable data, we’re stuck with this approach.
However, I became concerned (in the context of GERS) that the data used to create the allocation bases may be drawn for more than one source and that these disparate sources’ data may be expressed using differing criteria – e.g. differing time periods, accounting methods (cash or accruals basis), definition of contents etc – which could produce distorted results. For example, can anyone be sure that exports to rUK don’t contain goods for onward export via English ports? I’ve heard from former customs officers that different reports required immediate destination (e.g. a depot or port in England) or final destination (ultimate delivery to customer), which could explain a stat I once saw which claimed that England exported more Scotch Whisky than Scotland!
Given the hushing up of the McCrone Report, we shouldn’t be surprised to find statistics being massaged to Scotland’s disadvantage.
I think there is no really reliable rUK / Scottish trade data because there is nothing to base it on
I must co0ver the McCrone Report….
James McCollough says:
“The level of denial here is the ERG in reverse.”
Well actually it isn’t. See Timothy Rideout’s analysis. But if it were ERG in reverse I’d reckon that was likely to make for good policy thinking. Because most of what I’m hearing from the ERG is barking at the moon.
Given the ERG is the tail that wags the dog, that’s one clever tail to be barking at all. 🙂
I’m afraid they still don’t ‘get’ it.
Independence day is the day the country gets its currency.
Anything up to then is Brigadoon.
Correct Andy! I would love someone to attempt a detailed analysis of how Brigadoon could be implemented – probably badly – but the analysis would show that. For example, how would the Scottish central bank (existing from day 1?), wholly dependent on sterling and the BoE, finance the necessary activities of the Scottish Government using sterling? Under what constraints, and from whom? There would have to be some sort of joint ministerial committee at exchequer level – and we know how well joint committees have NOT worked in less contentious areas.
I’m sure there will be other questions such analysis would highlight (needing someone more knowledgeable than me to identify).
I do, however, have issues about “day 1” and how we define it . At what point will the collection of taxes such as VAT and company tax be fully in the hands of Revenue Scotland? We really need to get into the weeds here, e.g. there will be a (potentially quite long) period when the government will need to accept payments in two currencies.
By the way, I think Warren Mosler has the right approach when he says you must not force people to convert their sterling holdings to the new currency. I suspect that’s another area where the SNP will need to be better informed.
I know some will say we can resolve such details “later”, but surely we need to be able to answer all such questions – at least with preferred options.
Hi George,
I answer most of these questions in my paper on Creating the Scottish Currency. It is predicted that there would be a 2-3 year period between voting Yes in a referendum and actual Independence Day. That is used to establish the Scottish Reserve Bank, get notes and coins manufactured, etc. At or shortly after Independence Day (basically whenever the preparations are complete there would be ‘Bank Account Day’ and ‘Cash Day’. On the first folk who have asked to have their accounts wholly or partially exchanged (NOTE – this is absolutely NOT a case or re-denomination) will have their bank sell the contents of the accounts to the SRB who will issue new S£ to the bank who will then place that new money into entirely new S£ bank accounts. The old Sterling accounts will then be either closed or left open according to the wishes of the account holders. On ‘Cash Day’ cash machines, etc will change to issuing S£, and banks will be able to pay out S£ over the counter. At this point the rate would still be fixed at £1 = S£1, so you could still use a sterling bank card and get S£1 out for each £1, but behind the scenes your bank would be treating that as a foreign transaction and selling the sterling to the SRB in order to get the S£ to pay out.
I envisage that at the end of a ‘short’ period, say 1 month, the £ / S£ fix would end, the free exchange period would end, Sterling would cease to be legal tender and while shops etc could still choose to accept sterling (just as Jenners accepts US$), any bank transaction involving sterling would be a foreign transaction and subject to the usual bank fees, etc. The S£ would start to float. The Scottish Government would then require that all official payments (civil service wages, taxes and fees, supplier payments to Scottish suppliers, etc) would only be permitted in S£.
I envisage that maybe only 50% of the existing Sterling, perhaps even less, would get exchanged at the outset (that is still £50 billion or so going into the Foreign Reserves of the SRB), but the late exchangers would gradually find that it was both inconvenient and an exchange rate risk to carry on holding large amounts of sterling. So there would be a long tail of folk selling Sterling and buying S£. The SRB would have to keep issuing more S£ to accommodate that otherwise the S£ would be forced up against sterling.
There is at the outset little chance of speculative attacks on the S£ for the simple reason that the speculators and indeed anyone outside Scotland would not have any. Who would use e.g. $ to buy S£ only to then try to sell the S£ at a lower price? Short selling would be very risky as it would be a simple matter for the SRB to trap such folk in a bear trap as an when the contracts fell due for fulfilment.
See also the Common Weal publication on How to Start a Country
Thanks to both Timothy and Richard. I have read “How to Start a Country” Richard, and I’m familiar with some of your posts on this blog Timothy, but I don’t recall seeing “Creating the Scottish Currency”. Could you provide a link to it?
I referred to Warren Mosler’s explanation of how a Eurozone country like Italy could re-introduce the Lira, which is at https://www.youtube.com/watch?v=V2iBD1x5ofw&feature=youtu.be and some have argued this can be translated into how we would deal with the new £Scots.
Timothy, you appear to be disagreeing with Warren’s point about not forcing accounts to be converted when you say “at the end of a ‘short’ period, say 1 month, the £ / S£ fix would end, the free exchange period would end, Sterling would cease to be legal tender”. If so, can I ask you to expand on why that is?
I’m somewhat exercised currently about how having an independent currency is to be explained during campaigning to the general public, and how we answer the so-called experts on the other side of a new independence debate – hence the first part of my post.
So, I think we need a very clear statement of the issues with retaining sterling. As well as “refusing” to let us use sterling, the No-side usefully made some of those points in the run-up to September 2014, so we can re-use them! Mark Carney even assisted with his point about the reduction in Scottish sovereignty due to using the pound.
However, we need our own experts to explain in some detail the downsides of using sterling, as well as how they are resolved by having our own currency, with a short-form summary suitable for independence campaigners.
Mosler’s argument is crassly simplistic
I wish it was not – but it simply ignores the real issues that will arise and so helps no one
George Gordon says:
“Timothy, you appear to be disagreeing with Warren’s point about not forcing accounts to be converted when you say “at the end of a ‘short’ period, say 1 month, the £ / S£ fix would end, the free exchange period would end, Sterling would cease to be legal tender”.”
I think there a non sequitur there. Just because a fixed free exchange period ended (irrespective of the duration of it) Sterling wouldn’t cease to be legal tender in the sense of becoming valueless. Though its value would be subject to the vagaries of the exchange markets, and could go up or down, but it would still be exchangeable as long as Sterling remains a currency.
When you come home from Europe with Euros in your wallet they haven’t ceased to be legal tender they are just of limited use for your daily shopping (in most , but not all, parts of the the UK). If you convert them to Sterling on your return you get whatever the day rate is for exchange.
Regular foreign travellers and those buying imported goods (in dollars or Euros for example) are well aware that Sterling goes up and down all the time. Strictly speaking from second to second in volatile trading periods.
Some people would bet on the Scottish poond increasing in value against Sterling over a period and hold some of their savings in Sterling hoping to get a better rate of return in future. By the same token anybody who is prepared to mess about can hold savings in Dollars (or Roubles or Yen or whatever) and I’m sure lots of people do that. Some win some some lose, but most of us can’t be bothered and would probably lose anyway. Transaction costs invalidate doing this for modest amounts of money even if you guess right about about currency moves.
The only major concern I have is that there is advice to ordinary people who don’t play these money games so that when the option comes to convert savings to the new currency people know what the risks are of doing it immediately as opposed waiting. It’s more difficult a decision in reality than deciding whether to opt for a ‘bargain’ utilities contract, or fixed rate mortgage.
Thatcherism turned Britain from a nation of shopkeepers to a nation of speculators.
From the point of view of doorstep canvassing for indy voters, the important thing is that the SNP is clear about the need for a currency (and FFS stop dickering about !) and that they commit to it and then the canvassing is a piece of cake: a simple statement of the only sensible policy. Without a Scottish currency independence would be in name only.
Agreed
The exchange of sterling into S£ is voluntary but people will not be able to use sterling for any official transactions beyond the one month period. That is fundamental to any state creating a currency – you simply do not allow tax etc to be paid in anything else. That ensures the demand for your currency. People can of course keep their sterling but they will then have to pay bank charges to convert it to e.g. pay their council tax bill. You can’t run two currencies side by side – it simply does not work due to Gresham’s Law. Bad money drives out the good.
Tim says “you simply do not allow tax etc to be paid in anything else”, which is precisely what Warren says. And, obviously the government buys services using the new currency.
What you don’t do, according to Warren, is force people to convert their bank deposits from £ to £Scots (if you translate his point to our situation).
I don’t think Warren was being simplistic, he was just making one simple point, which he strongly believes would help support the new currency in a transition period – so not forever.
I merely asked if you disagree.
Ok, to clear up any confusion then sterling would cease to be legal tender in Scotland only. It obviously remains a major currency and can still be used in rUK, etc. The fact that it is no longer legal tender in Scotland would not mean shops could not accept it if they wanted to. Indeed companies could carry on paying wages in sterling if they wanted. But it would not be accepted for payment of any taxes or official fees, and all Scottish Government wages, benefits, etc would be in S pounds.
The exchange of sterling is and has to be entirely voluntary. So I am not disagreeing with anyone about that. I fully realise many people will be canny and will only exchange some money to start with. Of course most people live rather hand to mouth so don’t have large savings. So it is only really the middle class and wealthy that will have to think about how much sterling to exchange and when.
Things like shares ISAs would stay in sterling because the LSE is still in London so all quoted investments would still be priced in sterling. That would not change unless or until there was a Scottish stock market. You also can’t unilaterally change private contracts so credit cards, mortgages, etc would also have to stay in Sterling. They can only be changed if both the lender and borrower agree. What we can and should do is to provide sticks and carrots to encourage the parties to private contracts to redenominate them, or replace them. For example I could pay off my sterling credit cards and take out new Scottish Pound cards instead. Official debts such as Scottish Government bonds can and should be compulsorily redenominated as can be done under standard international law.
I think you will find private contracts can be over-ridden in the case of a country adopting a new currency….
Agree with George Gordon.
Mosler’s approach (as ever) is elegant and to the point, because bottom line the issuer of the currency always has the upper hand.
Simple? Yes. Simplistic? I think not.
I disagree….Mosler wildly missed his target on this one
I hope that Scotland insists on England settling its accounts in Scottish currency rather than in pounds if that £45bn is correct.
If an independent Scotland seeks to join (re-join) the EU, surely it would have as its currency the same as independent Ireland: the Euro.
No, it would not
It would have to commit to join
But Sweden did that and never has
The compulsion is to commit, and not to actually do so
“The compulsion is to commit, [to joining the Euro] and not to actually do so”
In an odd sort of way that’s what Gordon Brown did. But his caveats in the form of the five? six? tests made it very unlikely in the foreseeable future. If and when the Euro is fit to join it would possibly be a sensible option. The way the Eurozone operates presently it would be disastrous I think. To work effectively would require a degree of ‘federation’ which nobody seems to want. Many commentators are predicting the common currency will break before the political will exists to make it work properly.
@thecommongreen Dr Craig Dalzell, Head of Policy and Research at @Common_Weal “How to Start a New Country” has a fairly straightforward plan.
I recommend it
But I am a little biased about it…..
Richard: Presumably you mean ” I had a hand in the CommonWeal proposal “?
Timothy: In addition to the gas & electricity we can sell to rUk can we also include water..?
To some extent, yes
At 1,000 or more groats to the £1?
Would it not be cheaper for Scotland (and perhaps Ireland) to pay Wales and England (and the monarch) to leave the UK so it can remain a member of the EU with Ireland?
I am not sure NI and Scotland want to be in political alliance
Are you aware of the form book there?
Peace remains the objective.
The Republic of Ireland and Scotland could make a very attractive offer to NI (i.e. not in groats) being as they don’t like borders (except with England).
Irish and Scottish EU passports would still be very attractive to many people from England and likewise (but not EU unfortunately) for the NI folk seeking English or Welsh passports.
20 years should complete the transition.
Let’s not be silly: these are separate countries
“Let’s not be silly: these are separate countries”
I’m not sure I quite agree with the way Waggle describes this scenario, but I can see a degree of sense in the idea that England (and possibly Wales too) get on with Brexiting (if they must, and I wish they wouldn’t) making the new effective EU at the current England/Scotland border.
Any Brexit is going to lead ineluctably to the break-up of the UK so it would make sense to espouse that reality and seek the best way of making it work.
When Waggle says 20 years should see the process completed he has a point too. 20 years would have been a sensible timescale for Brexit properly negotiated. The 2 year Article 50 period has all but expired and the negotiating process has not really begun ….. we haven’t yet got past an infantile exchange of ‘red line’ ultimatums.
I keep coming back to the conclusion that the only sensible way forward from where we are is to revoke, rescind…whatever …..Article 50 (which it has been established is something we can do) and then consider the on-going state of the UK union and the future longterm relationship with the EU collectively or severally.
Only a handful of diehard, fantasist, headbangers would lose face under such an arrangement. A very small constituency. And they should anyway be content that the process is going their way, if only they would be patient and realistic about the timescale of major constitutional change.
“I am not sure NI and Scotland want to be in political alliance”
I’m pretty sure they don’t. It wouldn’t be worth Scotland forming a political alliance with NI since in all likelihood NI will merge into the Irish state in time and it could be relatively soon. But what the Brexit fantasy has refused to accept is that NI is still very raw from the ‘troubles’. The Stormont devolved government is not even sitting…. There’s a lot of on-going work to do there and the Brexit thrust has steadfastly ignored that and treated it as a trivial difficulty to be swept under the carpet.
Given that Scotland is predominantly (?) in favour of leaving the UK the possibility that the unionists of NI would want any kind of closer union with Scotland is for the birds.
Time will heal most of these wounds, but the Brexit timetable doesn’t allow time. In geopolitical terms Brexit is no more than a whim given a degree of political respectability it does not merit.
Britain used to have a reputation for international diplomacy. I think Brexit has shredded the last vestiges of that; even if the reputation was justified in the first place. (I’m not interested in arguing that question; the historians can play that game if they wish to)
As per the Copenhagen Criteria membership of the EU does not require a country to have its own currency. Membership of the Eurozone requires a country to have both a central bank and its own currency.
Scotland currently exports an estimated £49 billion (excluding oil and gas) to England and England in return exports an estimated £62 billion, that is a lot of English jobs to lose in the event of a petulant trade war.
https://en.m.wikipedia.org/wiki/Copenhagen_criteria
Nothing explicit in the Copenhagen Criteria, but –
“The acquis in the area of economic and monetary policy contains specific rules requiring the independence of central banks in Member States”.
So membership of the EU does seem to require a central bank – and hence an independent currency otherwise the CB could not be independent?
The EU does allow transitional arrangements in some cases, so perhaps that would apply in this case and we could apply before having our own central bank. However, there are many other reasons for moving swiftly to having a central bank and independent currency.
That is my reading….
As I understand it one of the prerequisites for (re) joining the EU is to accept the Euro as the main currency. So basically Scotland will have to replace it’s currency twice……I expect the Scottish income tax rate to soar as well as the work car park tax…..to pay for this folly.
No, it is to commit to jo8ning
No timescale is required
Sweden has never done it
@Steve Williams
“As I understand it …..”
Well that’s the sort of misinformation that constitutes project fear and which is peddled in a pro UK union press . To be fair the SNP, and the wider body of independence supporters, is not doing very well in demolishing this sort of hogwash….I put this down to the bruising they took in losing the first indy ref to project fear propaganda, much of which was aimed at exactly this area of economic illiteracy of the general populace.
Lies were told. And some of those lies, and variants of them, are still holding considerable sway over a populace that should have rather more discernment having watched the Brexit process from the sidelines. Since she is not allowed to lie in parliament (or at least not allowed to be called out for it) Theresa May has made a constant stream of disingenuous statements to mollify one side or or other of her Party factions almost alternately as she staggers-on day after day, week after week and dreary month after dreary month.
When the powers that be can lie and cannot be held to account democratic governance is in deep trouble.
A timely and quite blatant lie has done its work long before it can be corrected and often there is no comeback on liars who should have been barred from public office at the very least. But untruth seems to be the standard of political discourse these days. Lies of commission and lies of omission.
In my estimation what you say, Steve is not lying. I just think you are misinformed and repeating lies that you accept as truths. I think you are paying insufficient attention.
https://bellacaledonia.org.uk/2019/03/02/poundland-3/?fbclid=IwAR0fZMnUQ_oc9w3VqFAI9dHx7hLfslLtTif3evVrI4vZ-NJvfwEwbfqJSv4
Any comments on this Richard..?
I agree with it
“The acquis in the area of economic and monetary policy contains specific rules requiring the independence of central banks in Member States”.
But not that a country must have one, there is no requirement for a country joining the EU to have it’s own central bank.